China central bank urges commercial banks to curb loans, follow guidance UPDATE

China central bank urges commercial banks to curb loans, follow guidance UPDATE

	Published : Fri, 14 Sep 2007 12:15 By : Agencies Print this Story

BEIJING (XFN-ASIA) - China's central bank fired a warning to the nation's commercial banks, urging them to curb loans, follow window guidance and not solely focus on profits.

'Commercial banks should cooperate with the central bank in its monetary tightening policies... not just pay attention to their profits,' said Wu Xiaoling, vice governor of the People's Bank of China.

Figures released earlier this week revealed broad money supply was up 18.09 pct year-on-year at 38.72 trln yuan at the end of August.

While acknowledging that 'money creation is an important function of commercial banks', Wu said that banks 'should follow the moral suasion by the central bank especially when China is forced to create liquidity due to an imbalance of the external position.'

As of end-June, China's foreign exchange reserves topped 1.33 trln usd, aggravating the domestic liquidity glut under China's still largely controlled exchange rate regime.

Wu urged the boards of commercial banks, many of which are already listed entities, to keep in mind 'long-term interests' under current macroeconomic constraints.

'Banks' impressive profit growth in the past a couple of years is not sustainable if they continue to rely on interest incomes,' Wu said. 'Instead a diversification of income sources is the best for the their long-term growth.'

New yuan loans in August grew 17.0 pct year-on-year to 302.9 bln yuan, up from the 16.5 pct year-on-year growth in July, central bank figures showed.

Total new yuan loans in the first eight months this year reached 3.1 trln, compared with 3.2 trln during entire 2006.

'Commercial banks should also pay attention to the pace of giving out loans,' Wu said.

Wu also said China will continue taking measures to tighten credit at commercial banks.

She did not elaborate, but such measures are likely to include reserve requirement ratio hikes.

China has hiked the reserve requirement ratio seven times this year in an effort to curb rapid growth in credit.

Meanwhile, the central bank announced today that it is raising interest rates by 27 basis points with effect from tomorrow, marking the fifth rate hike this year.

(1 usd = 7.52 yuan)

jianbo.wu@xfn.com

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