The People s Bank of China, the country s central bank, has come up with a new concept which may indicate changes in its monetary policy. A faster pace of the appreciation of China s currency yuan, along with more interest rate hikes, could play a more important role than ever in taming rising inflation.
Instead of setting a specific target for the credit scale as it did previously, PBoC urged to pay more attention to the so-called social financing aggregate . According to the remarks by Hu Xiaolian, deputy governor of PBoC and Highlights of China s Monetary Policy in Q4 2010 issued by PBoC, that notion is expected to reflect the increasing diversification of the financing resources on the market, particularly the growing importance of direct financing.
The central bank believes that figures of social financing aggregate could provide more accurate information on liquidity than bank loans. According to a report by China Securities Journal on Thursday, social financing aggregate includes both credits on the balance sheet of commercial banks, but also off-balance-sheet financing business and financing resources beyond banks, such as the stock market and bond market.
The report also says that the central bank s preliminary statistics show China s social financing aggregate grows by 14.58 trillion yuan by the end of November 2010, which is twice as much as the yuan-denominated loans in the same period. More than one trillion yuan, for example, is raised through China s A share market.
Analysts believe the introduction of the new concept with a broader measurement of liquidity will make great difference to the central bank s monetary policy. Li Ruoyu, an expert with the State Information Center, commented on Shanghai Securities News also on Thursday that price tools, including the foreign exchange rate and interest rate, should gain more importance in the monetary policy mix as the effectiveness quantitative tools, including bank reserve requirement, open market operation and window guidance are increasingly undermined by direct financing resources available for commercial banks.
On Tuesday night, the People s Bank of China announced to raise the one-year benchmark interest rates for borrowing and lending by 25 basis points starting Wednesday. The central parity rate of the yuan rose to a fresh high of 6.5849 against the U.S. dollar on Thursday. It is the rise for the third consecutive trading day.
Li believes that direct financing beyond bank loans would weigh more in China s financing system in the future, which would further challenge the dominance of bank loans. Promotion of market-based interest rate pricing and more financial innovation has already been put on the agenda of the 12th Five-year Plan, the country s development strategy for 2011 2015. More progress of direct financing is predictable as a result, said Li.
However, she also warned that more importance attached to off-balance-sheet financing does not mean any relaxing of credit controls. Although regulators have not given any target for credit scale for 2011, any control over social financing aggregate could not be effective if credit grants by banks are not restrained effectively.
In 2010, China s yuan-denominated loanes exceeded the 7.5 trillion yuan target, reaching 7.95 trillion yuan.
