Deposit diversion arouses concern
By Feng Jie (China Daily)
Updated: 2004-07-27 08:34

Growing amounts of funds are circulating outside China's banking system partly due to the State's credit curbs aimed at cooling down growth, drawing attention from government officials and economists.

Such a diversion of deposits out of banks could have been welcome to the financial authorities who are encouraging spending and equity investment, but may not be so if a big part of the outflows turn out to be financing underground lending markets, or pushing up already high property prices, analysts said yesterday.

The growth in bank deposits by Chinese households has been sliding for the past five months, a phenomenon rare in recent years when they rose rapidly as a result of robust economic growth.

Increases in savings deposits totalled 17.8 billion yuan (US$2.1 billion) in June, down 43.2 billion yuan (US$5.2 billion) from the same period last year.

"This deserves our attention very much," said Guo Shuqing, deputy governor of the People's Bank of China, the central bank.

"We suspect funds are circulating outside the banking system, in areas such as cash transactions and private fund-raising, especially illegal fund-raising."

The State's tight credit curbs this year, aimed at bringing down the frenzied growth in bank loans and fixed investment, have restricted liquidity in many businesses, especially small and medium-sized ones (SMEs).

Some banks are tightening loans more strictly than the government wants, which is mostly harming SMEs and profitable firms, said Qin Chijiang, deputy secretary-general of the China Society of Finance.

New bank loans in the first half of this year were 350 billion yuan (US$42 billion) fewer than a year earlier, mainly due to decreases in short-term working capital loans and those through commercial bills.

"When controls are tightened on working capital to cause liquidity difficulties especially at smaller businesses, private lendings increase naturally," said Wang Yuanhong, a senior analyst with the State Information Centre (SIC), a government think-tank.

Low interest rates on bank deposits, with the one-year rate standing at a year's low of 1.98 per cent, have made underground lending far more attractive. The one-month lending rate in some underground markets has capped 1 per cent in recent months, earlier reports said.

"The macroeconomic adjustments expedited the diversion (of funds from banks)," Wang said.

In Wenzhou of East China's Zhejiang Province, where the nation's growing private sector is the most developed, loans among individuals and companies are estimated to have grown to 35 billion yuan (US$4.2 billion) in recent months, compared to an average of 20 billion (US$2.4 billion).

And the weighted one-month lending rate in the city's private lending market registered 1.197 per cent in June, the highest in 18 months, according to the central bank's local branch.

Although such unregulated private lendings may cause potential financial risks, some economists and officials have been calling for legalizing such behaviors and bringing them under official supervision.

Earlier this year, some central bank officials recommended drafting rules to legalize the bank's role as regulator of private lendings, setting ceilings on interest rates, and taxing such transactions.

Part of the funds staying out of the banking sector may also be flowing into the real estate market, said the SIC's Wang, citing a 20 per cent increase in Shanghai's property prices this year.

If that trend strengthens as people continue to expect higher property prices as the result of a government-led consolidation, it may undermine State efforts to cool down the overheated property market and closely-linked industries like steel, he said.

But the continued slowdown in deposit growth can also be explained by the fact that overall spending this year has been outstripping income rises, the researcher said.

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