Rise in bank loans sparks money supply discussion
Updated: 2007-07-13 16:41
China's outstanding local-currency loans rose 16.48 percent in June from a year earlier to 25.08 trillion yuan (US$3.31 trillion), according to the People's Bank of China, China's central bank.
Banks extended 451.5 billion yuan of new loans in June, bringing the total to 2.5 trillion yuan for the first half, and making last month this year's second highest after January, based on new loans.
The rise in bank loans could have significant effects on the overall money supply, and has sparked discussion amongst analysts in regards to the best way to measure the money supply.
Whether the loan growth is driven by enterprise development or motivated by the banking sector itself is of great concern to Gao Shanwen, chief economist with Essence Securities.
Gao said in his latest research report that he watches whether the lending interest rate goes hand in hand with the loan growth.
He said the rise in loans is driven by demand if the loan growth is coupled with the increase in loan interest rates and otherwise the rise is motivated by banks themselves, seeking to attract more customers by reducing lending rates.
Although outstanding local-currency loans grew rapidly in the first five months and have met nearly 70 percent of this year's loan target, the benchmark one-year lending interest rate dropped to 6.51 percent from 6.58 percent, according to statistics Gao has examined.
The lending interest rate dropped in spite of two loan interest rate hikes this year, which spells bank-motivated loan growth, Gao said. The central bank has raised interest rates twice this year and repeatedly ordered lenders to set aside more reserves to curb inflation, investment, and asset bubbles.
He said that stocks and other equity securities will definitely rise if the growth in loans is coupled with lower loan interest rates, and they will fall if loan growth is coupled with higher loan interest rates.
He also said in his report that "bank-motivated loan growth is an independent force for asset revaluation," adding that it plays an increasingly important role in assets revaluation, although currently the trade surplus remains the primary force for asset revaluation. China's forex reserve, the world's largest, rose 41.6 percent from a year earlier to US$1.33 trillion as of June 30.
Meanwhile, "past measures are not having much effect in slowing money supply growth as the trade surplus continues to rise," Wang Qian, an economist at JPMorgan Chase & Co, was quoted by Bloomberg as saying.
With the shareholding reform since 2005, banks have been focusing on loans to maximize returns for their shareholders, a trend which will continue to propel revaluation of assets including stocks, said Gao.
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