A lid on a sieve

19 November 2007 By Martin Hutchinson

The country s new lending restrictions might be effective though inefficient in a free market. But with foreign reserves used to prop up banks, China s lending bubble may have moved beyond control. Bad debt recognition is the key to restoring its financial system s health.

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China ordered its commercial banks to ensure that loans at the end of the year do not exceed loans at October 31. They had previously resorted to multiple interest rate rises as well as raising bank reserve requirements on deposits to 13.5%, the highest since 1987. The weighted monthly interest rate for interbank borrowing was 3.36% in September; the current rate for one year loans is 7.02%, compared with official inflation in the year to October of 6.5%.

RMB deposits in Chinese banks increased 16.84% in the year to September 30, M2 increased 18.45% and M1 increased 22.07%. RMB loans of Chinese banks increased 17.34% from a year earlier, while foreign currency loans increased 27.26%.

At September 30, China's foreign exchange reserves totalled $1,433.6bn, up 45.6% on the previous year.

China Investmemnt Corp, the country's first sovereign wealth fund with $200bn in capital, plans to invest one third of its capital to purchase Central Huijin Investment Co., which owns controlling stakes in China's four largest banks and another third to replenish the capital of the Agricultural Bank and the Development Bank of China prior to their privatisation.

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