China tightens bank credit to cool boom as currency hits new high | VailDaily.com
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China tightens bank credit to cool boom as currency hits new high

BEIJING – China took action Friday to cool its sizzling economy, tightening bank credit to stop frenzied lending and letting the Chinese currency hit a new high against the dollar.The move by Beijing followed this week’s announcement that the economy surged a stunning 11.3 percent in the second quarter, its highest rate in a decade, thanks to a construction boom and robust exports. Economists and officials worry that rapid growth could set off inflation or lead to dangerously high debt.The central bank raised the amount of money that most banks must deposit with the government by a half percentage point to 8.5 percent of their deposits as of Aug. 15, thereby reducing the amount available for lending.The step is meant to “strengthen administration of liquidity, curb the excessive growth of total credit and safeguard the momentum of economic development,” the central bank said on its Web site.Meanwhile, the yuan strengthened to 7.9815 yuan to the U.S. dollar, its highest level since the government revalued the yuan and cut its peg to the dollar exactly a year ago, allowing it to trade in a restricted range. Since then the yuan has risen just 1.6 percent against the U.S. dollar.Financial analysts had expected Beijing to take steps to restrain the economy. Tightening credit should help dampen investment in real estate, factories and other fixed assets that is underpinning the boom. At the same time, a stronger yuan might rein in growth by making Chinese goods more expensive and slowing exports.But government efforts to slow the economy have so far proved ineffective. Friday’s raising of the reserve requirement was the second time the central bank ordered an increase. And in April, the central bank raised a key lending rate 27 basis points, or hundredths of a percent, to 5.85 percent.China’s banks have overshot lending targets this year, handing out 2.2 trillion yuan ($275 billion) in the first half, or 90 percent of their goal for all of 2006, the government says.The central bank didn’t say how much money would be taken out of circulation by its order. But the earlier reserve increase removed 150 billion yuan ($18.8 billion) from China’s markets.The boom in exports, which rose 25.2 percent in the first half of the year, lends strength to arguments by Washington and other trading partners that China’s currency is undervalued and that Beijing should relax its grip on the yuan’s value.Chinese officials say they plan eventually to let the yuan trade freely on world markets but reject demands for a sharp increase in the exchange rate.Under the current system, the yuan is limited to moving 0.3 percent above or below a daily rate set by the central bank based on the previous day’s trading.But daily moves in Shanghai’s foreign exchange market have been far smaller. On Friday, for example, the yuan rose to 7.9815 from Thursday’s close of 7.9920 to the dollar.Economists suggested this week that Beijing could let the yuan rise faster by widening the trading band to 1 percent.The government also has tried to ease pressure on its small foreign exchange markets by creating new channels for Chinese companies to move money abroad for investment.On Friday, the government said three banks have been granted the first quotas under a program that is to allow Chinese institutions to exchange yuan to invest in foreign securities.Bank of China Ltd., Industrial & Commercial Bank of China Ltd. and Bank of East Asia Ltd. were approved to obtain a total of $5.3 billion in foreign currency for investment, the State Administration of Foreign Exchange said on its Web site.


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