SHENZHEN (ResourceInvestor.com) -- China's economy remains robust, but the People's Bank of China (PBC), must keep its foot on the brake for now.
According to the objectives of government macroeconomic policy laid out in the beginning of 2004, the People's Bank of China (PBC) planned to increase loans by 2.6 trillion renminbi. 1.79 trillion was released in the past three quarters leaving 810 billion to be released in the fourth quarter if the PBC intends to meet its full-year monetary policy and national growth goals.
The PBC has clearly been ratcheting back though when you look at the numbers - 835 billion in the first quarter, 598 billion in the second quarter and 360 billion in the third quarter. 810 billion means a big rebound in an economy that needs to be cooled. In October the PBC bought back 100 renminbi through open market operation in just two weeks, which would be negated by a release of the remaining credit.
Faced with rising inflation and a high fixed-asset investment rate the PBC must shortly make a choice about its remaining 810 billion credits.
Interest rate and exchange rate
On 29 October the PBC raised the central bank benchmark rate for one-year deposits by 27 basis points from 1.98 to 2.25 per cent, and the one-year lending rate by 27 basis points from 5.31 to 5.58 per cent.
Even though it was a mild move, it was still a strong tightening signal. Another implication is that the PBC is moving to rely more on market-oriented methods to manage the economy than its previous preference for more administrative methods such as credit control.
Yet it seems more aggressive action is necessary since inflation has remained higher than is apparently expected. The currency exchange rate is an obvious target to quell inflation and speculation.
In October $1 billion in "hot money" flowed to Hong Kong as a bet on the revaluation of the renminbi. More and more international hot money inflows run counter to tightening credit policies and the speculative nature of the money threatens to misallocate resources.
Expectations for revaluation are mounting yet on November 2 the State Administration of Foreign Exchange (SAFE) published three reports about combating illegal foreign exchange dealings. The implication was that the peg won't change in the short term.
Since no country can simultaneously keep its exchange rate fixed, monetary policy independent and capital markets open to the world, the PBC must sacrifice some of its monetary policy independence to keep the other two working.
How to spend the money
At the approach of the end of year, PBC begins to worry about the large amount of excess revenues.
The 2004 state financial budget planned for revenue of 2.5 trillion renminbi with a 187.9 billion renminbi increase reflecting 8.7% growth. In the first three quarters the accumulated tax revenues reached 1.9 trillion renminbi representing a 401.4 billion renminbi increase, or 26.3% growth. It is estimated that the increase will be 500 billion and surplus revenues will reach 300 billion Yuan this year.
In the context of inflation pressure and tightening monetary policy, how to spend the money requires deliberate coordination between the PBC and ministry of finance. Experts of the PBC say that they will pay close attention to the expenditure and take the corresponding open market operations to hedge the excess liquidity.
In the recent state council meetings Premier Wen Jiabao emphasized the prevention of speedy expenditure and extravagance.
The remaining two months of the year will be an interesting text for the PBC and more especially, the renminbi-dollar peg.