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Opinion / Commentary
Widening rate margin leading to more loans
By Ma Hongman (China Daily)
Updated: 2007-09-21 07:24
The People's Bank of China (PBOC), the central bank, released its
financial statistics for August last week.
The most striking figure is that bank loans increased 302.9 billion yuan
($39.85 billion) in the month while total bank loans grew by 3.08
trillion yuan in the first eight months of the year, already beyond the
expected bank loan growth for the year - 2.9 trillion yuan.
The higher-than-expected growth rate of the new bank loans is a clear
signal that investment fever is far from being reduced.
The central government has taken several measures to prevent the economy
from becoming over-heated.
Since the start of the year, the central bank has lifted interest rates
five times and the deposit reserve rate for commercial banks seven times
to reduce excessive liquidity and check soaring consumer prices.
Against such a picture, the financial statistics in the first eight
months have not followed the direction of the policymakers.
The primary reason is that the central bank's policy moves to tighten the
economy have been deflected and not fully observed in practice.
As businesses are after profits, the banks are an important part in the
money supply. The central bank raised interest rates to tighten
liquidity, but it has to depend on the commercial banks to realize this
goal.
The series of policy moves by the central bank has widened, rather than
narrowed, the interest margin of banks.
Thus, the commercial banks find lending more profitable. It has become a
natural choice for them to make more loans, turning a blind eye to the
central bank's attempt at reducing liquidity.
From October 2004, the PBOC has raised the interest rate for deposits and
loans nine times, the latest one effective since Monday this week. During
that period, bank loans did not cease growing despite all the interest
hikes.
That is because interest in demand deposits, money that can be withdrawn
at anytime without prior notice to the banks, was only raised on July 21
by 9 basis points, from 0.72 percent 0.81 percent. Meanwhile, the loan
interest has been raised nine times, each by 27 basis points.
It is needless to say the gap between the loan rate and the demand
deposit rate has widened dramatically as a result.
Authoritative figures show that demand deposits make up more than 50
percent of all bank deposits in our country. And the banks see a much
bigger margin between loan interest and deposit interest following the
interest rate hikes.
This bigger margin could be proved by the reports of the banks. The 13
commercial banks listed in domestic or foreign stock markets achieved a
total profit of 134.4 billion yuan in the first half of the year, 57
percent higher year-on-year.
China Merchants Bank, the Industrial Bank and Shenzhen Development Bank
saw their net profits for the first six months double compared to the
same period last year. The rest of the listed banks saw at least a 50
percent rise in net profit.
The listed banks admitted the interest margin has widened. In their
interim reports, they attributed their profit growth to the fact that the
central bank raised the benchmark interest for loans twice in the first
six months and demand deposits had an increased in proportion to the
banks' loans, so that the banks saw reduced debt costs.
In the first six months of the year, the Bank of China had a net interest
spread of 2.49 percent and a net interest margin of 2.66 percent, 37
basis points and 39 basis points higher year-on-year respectively. Both
figures indicate the profitability of the banks from taking deposits and
lending.
The Bank of China registered a net interest income of 71.027 billion
yuan, 29.6 percent more than for the same period last year.
Driven by the gigantic amount of demand deposits and the widening
interest margin, the commercial banks choose to lend as much as possible
to generate more profits, paying no heed to the planned growth of new
bank loans set by the PBOC.
This is the reason behind the increase in new bank loans.
The central bank has been applying a tightening monetary policy for quite
a while, but the design defect of the policy has led to an embarrassing
result: the tightening policy has encouraged the banks to lend more.
Of course, the high proportion of demand deposits has been caused by a
multiple of reasons. Most people choose demand deposits because they
prefer assets with better liquidity in the face of unpredicted
expenditure.
Under the to be developed social welfare system, a family or an
individual may need big sums of cash to cover education, medical care and
other costs. Keeping their money in a demand account, people feel assured
about being prepared.
If the central bank keeps the interest rate of demand deposits at the
current level for a long time, it is actually subsidizing the commercial
banks.
The PBOC cannot prevent commercial banks from garnering more profits from
the widened interest margin because it is purely a commercial choice. But
they can try to improve their policies to ensure the commercial banks
follow their instructions to tighten credit.
The author holds a doctorate in economics from the Shanghai Academy of
Social Sciences
(China Daily 09/21/2007 page10)
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