China will find it tough to strike the right balance between cooling lending while sustaining growth in the world's third-largest economy, a senior central bank official said in remarks published on Friday.
The People's Bank of China has increased required reserves twice this year, and economists suspect a third rise is imminent after output and inflation data on Thursday showed an economy with considerable momentum and mounting price pressures.
But officials have shied away from drastic tightening for fear that fragile global demand could still sap the economy. Most economists do no not expect interest rates to rise until the second quarter at the earliest.
"Excessive liquidity and lending are detrimental to the balanced, healthy and sustainable development of the national economy, but there are complex balances and challenges in timing, rhythm and intensity and in the choice of policy tools," Guo Qingping, an assistant governor of the People's Bank of China, told the Financial News.
"In the course of slowing monetary and credit growth, it will be very difficult to hold the right focus," Guo told the Chinese-language newspaper, which is published by the central bank.
In separate comments to Japan's Nikkei business daily, Guo said the central bank aimed to forestall runaway increases in asset prices this year while providing enough liquidity to support relatively brisk economic growth.
"But at the same time, the flexibility and accuracy of policy needs to be increased," the Nikkei quoted Guo as telling the paper recently in written comments.
As such, he said, the central bank would stick to the "appropriately accommodative" monetary policy it adopted in late 2008 to counter the global downturn — a stance reaffirmed last Friday by Premier Wen Jiabao in his annual address to parliament.
As part of its efforts to gradually withdraw the exceptional stimulus it has provided, the central bank has lowered this year's target for new lending to 7.5 trillion yuan ($1.1 trillion) from last year's record 9.6 trillion yuan.
Banks rushed to make use of the new quota at the start of the year, as they typically do, prompting the PBOC and the banking regulator to order lenders to slow down.
Figures released on Thursday seemed to show their arm-twisting was working. Net new lending halved in February to 700 billion yuan.
But the total was still high given it was a holiday-shortened month and the proceeds of a lot of last year's loans are still on deposit with banks, ready for companies to use.
Guo said that the "situation of monetary and credit growth must certainly turn around".
At the same time as the central bank gradually applies the brakes to money and credit growth, Guo said policymakers would deal selectively with local government-backed projects, continuing to support some while curtailing credit to others.
"A few agreements (for projects) may be cancelled," he said.
Guo said he was not optimistic that Chinese banks could continue reducing the proportion of bad loans on their books.
"Credit growth has been rapid, and the proportion of medium- and long-term loans is high, therefore problems with the quality of lending won't be exposed in the short-term but are a latent risk in the medium to long-term," he said.
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