Keeping the Scale of Lending at a Reasonable Level and Scientifically Managing Inflation Expectations

From: English Edition of Qiushi Journal Updated: 2011-09-20 13:38
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 Interview with Liu Mingkang, Chairman of the China Banking Regulatory Commission  

 Issues related to the scale of lending and inflation have attracted wide-spread attention recently. The CPC and the Chinese government have defined the focus of macroeconomic regulation in 2010 as ensuring at the same time steady and rapid economic development, adjustment of the economic structure and management of inflation expectations. This is the first time the term “inflation expectations” has appeared in China’s macroeconomic policy. In order to help readers better understand the issue, this reporter conducted an interview with Liu Mingkang, Chairman of the China Banking Regulatory Commission (CBRC).

 We must improve the structure of credit to ensure coordinated, balanced and sustainable economic development.

 Reporter: The year 2010 is crucial for China’s economic development. If credit policy is expanded too rapidly it could lead to overheated investment and inflation. On the other hand, if the liberal credit policy is reversed too soon it could lead to an economic downturn. How will China balance economic growth, credit policy and inflation?

 Liu Mingkang: Right now we need to concentrate on strengthening credit policy support for weak links in economic and social development as well as for employment, strategically important emerging industries and movement of industries, take effective measures to make it easier for agricultural operations and small businesses to obtain financing, ensure that key construction projects receive adequate funding and strictly control lending to industries that are energy-intensive, highly polluting or saddled with overcapacity. We not only need to maintain sufficient policy intensity and ensure steady and rapid economic development, but we also need to keep prices stable and effectively control inflation expectations. In addition, we need to consolidate the momentum of the economic turnaround and, more importantly, develop a mechanism for sustainable development.

 May 1, 2010, a resident of Urumqi buys mutton released from central mutton reserves. Mutton from the central mutton reserves is released on the market in Urumqi, Hotan and other parts of Xinjiang on the same day to stabilize mutton prices and meet consumer demand. Reports indicate that the market price of mutton from the central reserves was lower than the wholesale price in some places. / Photo by Xinhua reporter Zhou Shengbin

 Reporter: Credit plays a pivotal role in adjusting the economic structure, transforming the pattern of economic development and expanding consumer spending in a market economy and has been compared to a “sluice gate.” Therefore, credit policy is a crucial link in efforts to improve and upgrade the economic structure.

 Liu Mingkang: The current global financial crisis is exerting negative pressure on efforts to adjust China’s investment structure. First of all, we maintain strict control over new projects and mainly direct government investment toward ongoing projects and projects that are near completion to ensure adequate funding for key projects. At the same time, we must strengthen management of the platform for government investment and financing and strictly restrict loans to platform companies that do not make real investments or do not fulfill investment commitments, and implement protective measures to ensure that loans already issued will be repaid. In principle, we should not issue bridging loans. We need to eliminate all unreasonable obstacles to private investment as soon as possible. We also need to increase credit support to small enterprises and private entrepreneurs, implement preferential fiscal and taxation policies for loans to small enterprises, stimulate employment through the start up of new businesses, promote continued growth in incomes through increased employment and lay a solid foundation for expanding consumer spending. We need to actively support efforts to adjust the structure of the housing supply and speed up construction of government-subsidized housing. While continuing to help people obtain loans to purchase their first non-luxury housing unit for their own use, we need to strictly control lending to purchase a second housing unit and hold down speculative investment in housing. We need to steadily carry out the trial to set up consumer finance companies as part of the effort to make innovations in and develop consumer financing.

 Reporter: What principles should be followed in the implementation of the country’s credit policy?

 Liu Mingkang: One, we need to strictly define the limits of the credit policy. No loans should be granted for any projects that are not in line with industrial policy, do not meet the requirements to operate in the market, do not meet the technical standards of the industry, lack adequate capital or have not been examined, approved and verified in accordance with the specified conditions and procedures. Any such project that has already been granted credit should not be issued a loan, and protective measures should be taken to ensure that loans already issued for such projects will be repaid. Two, we need to strengthen management of credit for key industries. We need to work out a detailed guide for extending credit according to the main industries and characters of the applicants and on an industry-by-industry, project-by-project and enterprise-by-enterprise basis and strengthen regulation of credit for enterprises and projects that are energy-intensive, highly polluting, have safety issues and pose health risks. Three, we need to strictly adhere to the accountability system to identify responsibility for due diligence review, credit extension review and post credit extension management to ensure that the credit policy is fully implemented.

 We must implement an appropriately easy monetary policy and strictly control lending risks.

 Reporter: The central government has stated that it intends to continue following an appropriately easy monetary policy, but how can we ensure the monetary policy is “appropriate” in this complex domestic and external economic environment?

 Liu Mingkang: The difficulty in lending policy lies in how to ensure it is “appropriate.” Inadequate availability of loans would be bad, but excessive lending would also be bad. The availability of loans must be in line with the development of the national economy. We fully implemented the requirements of a national macroeconomic regulation policy in 2009, adjusting current policy measures, introducing new ones, adding to some and improving others to promote prompt and effective availability of credit for the real economy. Overall, we met the requirement for “appropriateness” in credit policy. 

 The focus of efforts this year is to gradually strengthen the focus and flexibility of policy while maintaining stability and continuity. We are calling on all financial institutions with banking functions to properly balance maintenance of the quality of capital, maintenance of the quality of credit and the need to ensure sustainable development, to avoid excessive growth of credit and prevent excessive quarter-to-quarter and month-to-month fluctuations while first of all ensuring there is effective demand for loans from the real economy and that they have sufficient capital for lending. In addition, we are calling on all banking financial institutions to follow a principle of parceling out a loan only as needed by tightening management of the entire lending process, matching the life cycle of loans to the key life cycle of borrowing enterprises and keeping the outflow and inflow of credit funds in line with the effective cash flow of enterprises to ensure a reasonable scale of lending.

 Reporter: China and other countries have both shown that making loans freely available can stimulate rapid economic growth, but may also lead to an increase in non-performing loans on the books of financial institutions, so how can we keep risk to a minimum?

 Liu Mingkang: In general, a large expansion of credit can lead to an increase in bad loans, but if appropriate measures are adopted, the increase can be effectively controlled. At the same time, there is a certain time lag for the appearance of an increase in bad loans after the expansion of credit, so as long as appropriate measures are taken, the risk can be effectively ameliorated. The total outstanding balance of non-performing loans and the proportion of bad loans in China’s financial institutions with banking functions have both remained at a low level and are both decreasing. The total outstanding balance of all non-performing loans on the books of commercial banks at the end of November 2009 was 493.5 billion yuan, 66.8 billion yuan less than the outstanding balance at the beginning of the year, and the proportion of non-performing loans was 1.60%, 0.82% less than the proportion at the beginning of the year. This has laid a foundation that will enable us to cope with future risks.

 During the next stage we will improve management and control of four key areas of risk by requiring banking financial institutions to resolutely control their capital adequacy ratio, their reserve ratio to cover non-performing loans, their leverage ratio and their proportion of concentrated large-sum risky loans and implement dynamic adjustment to increase resistance to risk and control of risk. In addition, we will strictly control the risk of concentrated large-sum credit extension by strictly limiting credit extension to an individual customer within 10% of the capital balance of a commercial bank and to a group, within 15% of the capital balance.

 Reporter: Because of the profit-seeking nature of capital, borrowed funds are being used to invest in the stock market and property market in violation of regulations in some localities and there have also been some cases of illegal arbitrage. How to curb this phenomenon at the source to ensure that more credit funds flow into the real economy has become a problem that must be addressed.

 Liu Mingkang: The China Banking Regulatory Commission in 2008 adopted strict measures to combat misappropriation of borrowed funds for investment in the stock market or property market and arbitrage in violation of the regulations. In 2009 we adopted several policy measures to curb the problem of such violations at the source, including Interim Measures for Managing Fixed Asset Loans, parceling out a loan only as needed instead of placing the entire loan amount in one lump sum in the borrower’s account and requiring loans to be granted in strict accordance with construction progress to ensure that more credit capital flows into the real economy and is really used by customers for production, construction, services, operations or consumer spending. These efforts represent a milestone in the effort to fundamentally standardize the use of borrowed funds, ensure the safety of credit funds and protect the rights and interests of consumers of financial products. This year, we will also be adopting strong and effective measures to promote implementation of the above regulations. It should be pointed out that these requirements, rather than tightening conditions for obtaining a loan, will actually help protect the safety of the funds of borrowers. Therefore, they will not hinder banks in satisfying the legitimate needs of their customers for loans.

 Reporter: The recently introduced regulations on subordinated debt and the stricter requirements for the capital adequacy ratio will undoubtedly slow down expansion of credit in commercial banks, but can they fundamentally reduce the systemic risk in the banking industry?

 Liu Mingkang: An important lesson learned from the current global financial crisis is that banks must have a sufficient amount of capital and quality assets in order to be effectively immune to serious risk. The Notice on Improving the Mechanism of Commercial Banks for Replenishing Capital makes the fundamental requirement that banks carefully balance development of business, prevention and control of risk and management of capital, and basically maintain stability of their capital adequacy ratio and the overall quality of their assets. These regulations will effectively restrain commercial banks whose capital adequacy ratio is approaching the mandated lower limit from continuing to grant loans. This is absolutely essential to reduce risk for individual banks and systemic risk in the banking industry as a whole. In the long run, a banking system with adequate capital and quality assets can guarantee steady supply of funds to sustain prosperity in the real economy. We required large banks to maintain their capital adequacy ratio above 11% and small and medium-sized banks, above 10% in order to strictly restrain capital and ensure that the banking industry is able to continuously support economic development.

 We must make guidance more reasonable and manage inflation expectations well.

 Reporter: As the Chinese economy rebounds and the global economy begins to recover, inflation expectations in China are increasing. How do you see this issue and how can these inflation expectations be guided and managed? 

 Liu Mingkang: There are three main reasons for inflation expectations to increase. First is the positive growth of the consumer price index (CPI). The CPI rose 0.6% year-on-year in November 2009 and 0.3% compared to the previous month, reversing the previous negative growth trend. Second, in the fourth quarter of 2009, both the central and local governments intensified pricing reform for resource products and public utilities, significantly raising the prices of some resource products and the prices of some public utilities that have been too low for a long time. Third is the gathering recovery of both the domestic and foreign capital markets and real estate markets accompanied by quickly rising property prices and major commodity prices.

 We need to watch this situation very closely so we can scientifically guide and manage inflation expectations. One, we must do more to keep the public informed about government policy and other important information in order to ensure that people form conclusions based on the facts and weaken the tendency for an increase in inflation expectations to feed on itself. Two, we need to apply a combination of monetary policy tools, scientifically regulate liquidity in the market and maintain a reasonable level of liquidity. Third, we must not introduce pricing reform for resource products and public utilities too quickly and raise their prices significantly to avoid greatly stimulating people’s inflation expectations because price reforms are introduced all at once. Fourth, we must improve social management, strengthen the social security system and increase welfare support for the low-income segment of the population.

 Reporter: Another reason why inflation expectations have been increasing recently is the rise in the prices of major commodities due to the impact of the depreciation of the US dollar against a backdrop of global excess liquidity. This has caused some people to worry about external conditions causing inflation, but are there any grounds for this? 

 Liu Mingkang: Whether or not external conditions will cause inflation in China will mainly depend on three factors. One is how the global economic recovery and global inflation will go. The unemployment rate is still high in developed countries and they still need to reduce or absorb their large excess production capacities and promote the growth of new industries and new areas of economic growth, so recovery of the global economy will be necessarily a slow, complex and tortuous process. Although global liquidity is fairly ample, the possibility of global inflation under these conditions is not great. Two is the shift in global prices of major commodities. Developed economies are still the main commodity consumers. With the slow economic recovery of developed countries, there is no pressure for a sustained rise of global commodity prices. The expectation of long-term depreciation of the US dollar and various speculative operations may raise some commodity prices in the short term, but it is not likely that this will become a long-term trend. Moreover, development of low carbon economy and the development of renewable energy and substitution technologies will also lower demand for commodities such as fossil fuels and, to a certain degree, will inhibit expectations for a rise in major commodity prices. Three is the eventual reversal of stimulus policies in developed economies. Since economic recovery is still not strong in developed economies, we cannot expect a substantial retreat from their stimulus policies in the near future. However, a gradual turn for the better in the fundamentals of their economies and increasing pressure due to greater public debt will sooner or later lead to reversal of their stimulus policies, and the liquidity promoting higher commodity prices will markedly weaken. Therefore, I believe there is little possibility of greater inflation in China due to external conditions in the near future.

(From Qiushi in Chinese, No. 5, 2010)

Note: Interview conducted by Gu Baoguo, a reporter of Qiushi Journal

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