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Wednesday, 31 December 2008
Ex-PBOC Official Warns Further Monetary Easing Could Backfire
A former mainland central banker has called for a halt to the country’s recent flurry of actions to loosen monetary policy, a view partially echoed by analysts.
Ex-PBOC Official Warns Further Monetary Easing Could Backfire
Martin Zhou in Beijing 30 December 2008
A former mainland central banker has called for a halt to the country’s recent flurry of actions to loosen monetary policy, a view partially echoed by analysts.
Wu Xiaoling, who was a deputy governor of the People’s Bank of China before she left a year ago, said deep cuts in interest rates and reserve requirement ratios intended to boost lending could backfire, damaging confidence and adding pressure to bank balance sheets.
“I don’t think we should do more on the monetary policy side,” Ms. Wu, now a vice-head of the financial committee of the National People’s Congress, told the Economic Observer newspaper yesterday.
“Intensive policy moves will not help stabilise market expectations. Instead, they will cause panic among companies and the public, making the situation worse.”
After five interest rate cuts in the past 3-1/2 months, rounded off by a 27 basis point reduction last week, the benchmark one-year lending rate stands at 5.31 per cent, against 7.47 per cent before mid-September.
Ms. Wu also argued that further lowering banks’ reserve requirement ratios would do little to boost the credit available to cash-tight corporate clients.
“Instead, it might eat into some previously due income for the banks and weaken their financial position,” she said.
After four cuts in quick succession, the reserve requirement ratios have fallen to 15.5 per cent for large banks and 13.5 per cent for smaller lenders, from a uniform 17.5 per cent before the latest round of monetary easing measures.
Having adopted cautious lending policies in an uncertain economy, banks would continue to prefer central bank reserves as a safe haven for their funds, notwithstanding the prospect of further reserve ratio cuts, analysts said.
“That mindset - driven naturally by risk aversion - will not only render lowering the ratio meaningless in terms of unleashing liquidity but also put a bite on some of the previously guaranteed gains for banks,” said Li Yamin, an analyst at Shenyin Wanguo Securities.
“Since most prominent domestic lenders are listed companies, that scenario can even cause further uncertainty in the capital markets.”
But Ms. Li said her firm would stick to its forecast of a further 100 basis point cut in lending rates before the end of next year. She said the reserve requirement ratio would fall a further 2 to 3 percentage points because of the need to “co-ordinate with monetary policy moves by other central banks around the world”.
Li Wei, an analyst at Standard Chartered Bank, said possible further rate cuts might - as Ms. Wu had pointed out - dent business confidence among a few lenders. But the cuts would help the much-vaunted stimulus package, which is believed to rely heavily on bank financing.
“Admittedly, it’s a matter of a demand slump [for the real economy] at the moment instead of funding costs,” Mr. Li said. “But you will certainly find their [interest rate cuts] value in speeding up the coming recovery process.”
Standard Chartered expects the one-year loan rate to drop to 4 per cent in the second quarter next year.
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Ex-PBOC Official Warns Further Monetary Easing Could Backfire
Martin Zhou in Beijing
30 December 2008
A former mainland central banker has called for a halt to the country’s recent flurry of actions to loosen monetary policy, a view partially echoed by analysts.
Wu Xiaoling, who was a deputy governor of the People’s Bank of China before she left a year ago, said deep cuts in interest rates and reserve requirement ratios intended to boost lending could backfire, damaging confidence and adding pressure to bank balance sheets.
“I don’t think we should do more on the monetary policy side,” Ms. Wu, now a vice-head of the financial committee of the National People’s Congress, told the Economic Observer newspaper yesterday.
“Intensive policy moves will not help stabilise market expectations. Instead, they will cause panic among companies and the public, making the situation worse.”
After five interest rate cuts in the past 3-1/2 months, rounded off by a 27 basis point reduction last week, the benchmark one-year lending rate stands at 5.31 per cent, against 7.47 per cent before mid-September.
Ms. Wu also argued that further lowering banks’ reserve requirement ratios would do little to boost the credit available to cash-tight corporate clients.
“Instead, it might eat into some previously due income for the banks and weaken their financial position,” she said.
After four cuts in quick succession, the reserve requirement ratios have fallen to 15.5 per cent for large banks and 13.5 per cent for smaller lenders, from a uniform 17.5 per cent before the latest round of monetary easing measures.
Having adopted cautious lending policies in an uncertain economy, banks would continue to prefer central bank reserves as a safe haven for their funds, notwithstanding the prospect of further reserve ratio cuts, analysts said.
“That mindset - driven naturally by risk aversion - will not only render lowering the ratio meaningless in terms of unleashing liquidity but also put a bite on some of the previously guaranteed gains for banks,” said Li Yamin, an analyst at Shenyin Wanguo Securities.
“Since most prominent domestic lenders are listed companies, that scenario can even cause further uncertainty in the capital markets.”
But Ms. Li said her firm would stick to its forecast of a further 100 basis point cut in lending rates before the end of next year. She said the reserve requirement ratio would fall a further 2 to 3 percentage points because of the need to “co-ordinate with monetary policy moves by other central banks around the world”.
Li Wei, an analyst at Standard Chartered Bank, said possible further rate cuts might - as Ms. Wu had pointed out - dent business confidence among a few lenders. But the cuts would help the much-vaunted stimulus package, which is believed to rely heavily on bank financing.
“Admittedly, it’s a matter of a demand slump [for the real economy] at the moment instead of funding costs,” Mr. Li said. “But you will certainly find their [interest rate cuts] value in speeding up the coming recovery process.”
Standard Chartered expects the one-year loan rate to drop to 4 per cent in the second quarter next year.
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