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China central bank pledges "ample" liquidity to sustain growth (05/07/09)

BEIJING, May 6 (Xinhua) -- China's central bank said Wednesday the economy is doing "better than expected" in the first quarter, and pledged to maintain "ample" liquidity in the financial system for economic recovery.

China would stick to its moderately easy monetary policy and ensure "ample" liquidity at banks, the People's Bank of China (PBoC) said in its quarterly monetary policy report posted on its website.

The country has pumped 4.58 trillion yuan (670 billion U.S. dollars) of new loans into the economy in the first quarter to stimulate growth.

The figure is already nearing 5 trillion yuan of new loans targeted for the whole year. In March alone, new loans increased by a record 1.89 trillion yuan.

The country's financial institutions and enterprises would digest the huge amount of new loans in the following months, the report said.

Industry insiders have said credit extended by China's banks in April may have dropped to above 600 billion yuan after staying at above 1 trillion yuan for three straight months.

The central bank said new lending from commercial banks focused on government-backed projects. It encourages more bank loans to be channeled to small and medium-sized enterprises as they play an important role in the national economy and in increasing employment.

The central bank said in the first-quarter monetary policy report it would continue to instruct financial institutions to extend new loans, despite the earlier surge.

The pick-up in bank lending is conducive to stabilize the financial market and boosting market confidence, PBoC said. Meanwhile, the bank urged lenders to improve credit quality to avoid a possible rebound in bad loans.

There have been "positive changes" in the economy in the first quarter, the bank said, echoing remarks made by Premier Wen Jiabao last month.

The quarter-on-quarter growth is improving, compared to the fourth quarter of last year, it said, without giving specific figures.

China's economy expanded 6.1 percent in the first quarter, the lowest pace in 10 years and down from 9 percent in the fourth quarter last year.

The central bank also said foundations for the recovery are not solid, as uncertainties in external economies still exist and private investment is yet to become active with new lending concentrated on government projects.

In listing uncertainties ahead, the bank said the country still has to battle against the financial crisis that is unfolding and a collapse in external demand that is hurting exports.

The country is also under great pressure to create enough jobs and from a slower growth in residents' income, which would suppress future consumption, it said.

The bank also warned overcapacity and insufficient demand may drive prices lower in the country with the world economy in a downturn.

But it also said continued falls in prices may become less likely along with the world recovery, a turnaround in the national economy and fast credit growth.

"Prices of primary products and assets may rebound quickly once investor confidence is restored, as the global credit is relatively loose thanks to injection of liquidity and stimulus packages across the world," the bank said.

The central bank also said it was concerned that the extraordinary monetary policy adopted by other major economies would result in inflation risks.

It referred to the quantitative easing policy adopted by the U.S., Japan, Britain and Switzerland to pump cash into their economies.

The quantitative easing policy meant increasing currency supply through purchasing mid- and long-term treasury bonds after central banks cut interests rates to near zero.

The extraordinary monetary policy harbored huge risks for international financial markets and the global economy, said the central bank.

It would increase the risk of global inflation, said the central bank, suggesting it would create new assets bubbles and inflation if central banks of major economies failed to mop up thehuge liquidity when the global economy recovered.

"A policy mistake made by some major central banks would put the whole world in risk of inflation," it said.

The quantitative easing policy would also make exchange rates of major currencies more volatile, according to the report.

The central bank cited the U.S. move to purchase treasury bond in March as an example, saying although the dollar had appreciated against other major currencies, it fell after the purchase.

PBoC said the policy would leave the bond markets subject to fluctuations.

It said massive purchase of mid- and long-term treasury bonds may keep yield at a low level. But in the long run, as the financial markets returned to stability and the economy recovered, inflation expectations would grow, interest rates would rise, and bond prices would adjust sharply, according to the report.


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