Chinesepod - Widening rate margin leading to more loans

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BIZCHINA / Review & Analysis

Widening rate margin leading to more loans

By Ma Hongman (China Daily)
Updated: 2007-09-21 14:03

The People's Bank of China (PBOC), the central bank, released its
financial statistics for August last week.

The most striking figure is that bank loans increased 302.9 billion yuan
(US$39.85 billion) in the month while total bank loans grew by 3.08
trillion yuan in the first eight months of the year, already beyond the
expected bank loan growth for the year - 2.9 trillion yuan.

The higher-than-expected growth rate of the new bank loans is a clear
signal that investment fever is far from being reduced.

The central government has taken several measures to prevent the economy
from becoming over-heated.

Since the start of the year, the central bank has lifted interest rates
five times and the deposit reserve rate for commercial banks seven times
to reduce excessive liquidity and check soaring consumer prices.

Against such a picture, the financial statistics in the first eight
months have not followed the direction of the policymakers.

The primary reason is that the central bank's policy moves to tighten the
economy have been deflected and not fully observed in practice.

As businesses are after profits, the banks are an important part in the
money supply. The central bank raised interest rates to tighten
liquidity, but it has to depend on the commercial banks to realize this
goal.

The series of policy moves by the central bank has widened, rather than
narrowed, the interest margin of banks.

Thus, the commercial banks find lending more profitable. It has become a
natural choice for them to make more loans, turning a blind eye to the
central bank's attempt at reducing liquidity.

From October 2004, the PBOC has raised the interest rate for deposits and
loans nine times, the latest one effective since Monday this week. During
that period, bank loans did not cease growing despite all the interest
hikes.

(For more biz stories, please visit Industry Updates)

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