China's central bank shows consistency on following and addressing hot issues of the economy and urges Chinese banks to improve services and prevent risks.

In an interview with Xinhua on May 14, the People's Bank of China spokesman illustrated the reasons for fast increase in bank loans, measures to balance the international payment and the risks of short term foreign debts.

He noted that the central bank would keep consistency and stability in implementing prudent monetary policy to provide stable financial environment to facilitate the economic structural readjustment and the economic growth model transformation.

Balancing the international payment

The spokesman reiterated the four measures to achieve the balanced international payment. Firstly, China will have domestic demand, especially the domestic consumption to play a bigger role in boosting the economy through the structural readjustment of the economy. A fast and stable growth is supposed to be driven by the combination of external and internal demands.

Secondly, China will transform the foreign trade growth model by optimizing and balancing the mix of imports and exports. Resource-oriented exports with high energy consumption and serious pollution will be restrained while imports of hi-tech know-how and equipment will be encouraged. What's more, scientific progresses and stronger independent innovation ability are crucial.

Thirdly, the foreign capital should be used more efficiently so that it contributes more on industrial structural upgrading and coordinative regional development.

Fourthly, the domestic financial market should be further developed to support the "going global" strategy of businesses. Partnership should be sought to use effectively both the domestic and overseas markets and resources.

The spokesman made commitments again on further reform of foreign exchange regime. He said China would improve the forex management, promote the trade facilitation, move toward the convertibility of the capital account, and tap more channels of capital outflow.

It will also nurture and develop forex market, optimize the RMB exchange rate forming mechanism, strengthen the management of short term capital flow, as well as the monitoring and warning of the international payment.

His remarks echoed the PBOC governor Zhou Xiaochuan's in March this year, when the governor made it clear that the existing floating band was enough and need no adjustment but would likely be expanded in the future according to the international and national scenarios. Zhou also stressed the gradual process of loosening the capital account after the efforts on relaxation of RMB convertibility these years and promised more freedom on the use of foreign currencies.

Zhou reaffirmed in March the principle of forex operation that safety and liquidity should be ensured and the value should be kept and raised. He denied that the central bank would reduce its total dollar assets although adjustment was possible to adapt to the international market.

Short term debts safe

The central bank spokesman attributed the fast growth of the short term debt to the soaring foreign trade and foreign traders' willingness of preventing foreign exchange rate risks by payment arrangement.

77.1 percent of the growth in short term debts were generated by trade credit. By the end of 2005, the balance of China's trade credit came to 90.8 billion US dollars, which was 25.4 billion US dollars more than that of 2004, or up by 28 percent. It made up 32.3 percent of the country's total foreign debts, which was 5.9 percentage points higher than 2004.

China posted 1.4 trillion US dollars of foreign trade in 2005, suggesting rising needs for trade financing. In addition, importers and exporters tend to prevent foreign exchange rate risks by deferred payment and settlement in advance.

China holds sufficient forex reserves, which makes its foreign debts safe according to the international standards. Trade credit is normally based on substantial trade and will not cause abrupt capital influx and outflow.

China has reinforced its foreign debts pre-warning system to fence off the financial risks accrued from foreign exchange. All of those combine to put China's short term foreign debts risk under control.

Dealing with fast growing loans

When it came to the soaring loans, the central bank spokesman explained it was driven by brisk demand for loans due to the swelling fixed assets investment under the fast economic growth. China's trade surplus which continues moving up has boosted the country's forex reserves, which means more money supply for lenders.

He added that commercial banks were more motivated to grant loans to improve the returns on asset and meet shareholders' expectation. Some banks prefer granting more loans at the first half of the year in a bid to receive yields early. Since 2003 the growth of loans in the first half of the year has been faster than the second.

The central bank announced on April 28 a rise in the 12-month loan rate from 5.58 percent to 5.85 percent to curb the upswing of credits. The spokesman stressed that the central bank would adhere to the prudent monetary policy and achieve the rational growth of money supply and loans.

He urged banks to consolidate the capital adequacy limits and improve the financial services. Specifically, banks are supposed to control loans to sectors plagued with overinvestment on one hand and support less weaker industries on the other.

He hopes that banknotes financing would play a positive role in bolstering small and medium sized enterprises and the business would boom in a healthy way.