China's policymakers are growing concerned that intensified monetary policy support has led to excessive liquidity in the banking system which isn't being funneled into the real economy.
Chinese lenders have been flush with cash since early last year when Beijing started to cut banks' reserve requirements and guide down lending rates to aid the country's faltering economy. But weak demand for loans from businesses and consumers means vast cash deposits sit idle in banks, eroding the effectiveness of policies meant to stimulate growth, economists say.
Senior Chinese government officials have in recent months raised alarms over idle funds. Premier Li Qiang warned earlier this month that cash shouldn't be circulating in the system for no good reason, while China's top lawmakers noted in November that cash was moving between banks, or between banks and large companies, thus squeezing out funding for smaller enterprises.
In a sign of growing concerns, the People's Bank of China said this week that it was doubling down efforts to monitor such funds with a focus on corporate loans being converted into deposits or lent again to third parties.
Xuan Changneng, a PBOC deputy governor, Thursday said it is working with other authorities to more efficiently use the funds. He added that such regulatory moves were showing results but didn't offer any details.
The remarks came after a surprise drainage of liquidity last Friday, when the PBOC withdrew a net 94 billion yuan ($13.1 billion) of cash from China's banking system via its medium-term lending facility at unchanged interest rates, the first time it has made such a move in 16 months.
When announcing last week's cash withdrawal, the central bank said it had fully satisfied financial institutions' needs. Economists say that while this rarely-used language doesn't represent a policy shift, it signalled that authorities are wary of speculative risks stemming from recent liquidity boosts which seem to be helping a bond market rally rather than support the economy.
Since last March, the PBOC has cut the amount of cash that banks must hold as reserves three times, freeing up trillions of yuan in liquidity, in addition to trimming key policy rates.
However, economists say Beijing needs to step up fiscal stimulus to boost consumer and business confidence. Sentiment has been battered by deflationary pressures, a protracted property sector slump and a massive stock-market rout, and borrowing won't pick up until confidence improves.
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(END) Dow Jones Newswires
03-22-24 0422ET
