People’s Bank cannot solve China’s fund shortage alone

People’s Bank cannot solve China’s fund shortage alone

Staff Reporter

2013-12-24

China’s market has again reported a fund shortage but as the nation still has more than 100 trillion yuan (US$16.5 trillion) of circulating M2, the situation has resulted from the country’s twisted bank funding structure and lack of a reasonable funding plan, reports the Chinese-language Shanghai Securities News.M2 is a measure of money supply that includes coins, currency, checking account balances, savings and short-value time deposits.

To solve the problem, China cannot rely solely on the People’s Bank of China, the nation’s central bank. Authorities should instead aim to restructure the real economy, promote market-oriented interest rate reform, and push for the combination of reforms in state-owned enterprises and local governments, the paper said.

On Dec. 20, the seven-day repurchase agreement (repo) rate average surged to 8.21%, a half-year high, reminding people of the serious liquidity crisis back in June. The fund shortage is not just restricted to interbank trading, but has now spread to general investors.

While the market has reported fund shortages again, the M2 money supply, as of the end of November, rose 14.2% from the same period a year earlier to 107.9 trillion yuan (US$17.8 trillion). The whole-year M2 growth should have no problem exceeding the 13% target set earlier this year, indicating that there is no fund shortage at all.

On June 20, after two straight weeks of tightening liquidity, the overnight bank collateral repo rate hit a record high of 30% and the seven-day repo rate hit an intraday high of 28%. After June 20, the market tended to see higher rates whenever the central bank stopped its reverse repo operations. An unnamed trader told the paper that a trader that has yet to experience the overnight repo rate of 30% cannot be seen as a good one.

In recent years, as the wealth management products, mostly related to property market, quickly expanded, related loan rates have been rising. The situation reflects the twisted funding structure, in which investors have high anticipation for rising property prices while local governments — which are behind the funding platforms — are not sensitive to interest rates, thus leading to the rising loan rates, said Peng Wensheng, chief economist at China International Capital Corporation.

Liu Yuhui, director of the Financial Laboratory at the Chinese Academy of Social Sciences said that local governments have for a long time provided funds to many uncompetitive enterprises which have relied on huge credit resources for survival. They have thus funded irrational items and made the money turnover rate slow, instead relying on the push from newly increased currency circulation, Liu said, adding that Beijing has now realized that the fund shortage problem cannot be resolved by the central bank alone.

In June, Premier Li Keqiang mentioned several times about the liquidity issue, asking banks to make better use of existing credit and step up efforts to contain financial risks. The main point is, via the hands of banks, to lead the funds to fuel the economy, the emerging industries, agricultural and micro enterprises, and to reach a balanced economic structure, the paper said.