China central bank assures "ample" liquidity to sustain economic recovery

China's economy is fairing "better than expected" in the first quarter of 2009, and the country's central bank will follow a moderately loose monetary policy and with "ample" liquidity in the financial system to sustain economic recovery, the People's Bank of China said in its quarterly report.

New loans increased by a record of 1.89 trillion yuan ($277 billion) in March, totalling 4.58 trillion yuan in the first quarter, nearly 5 trillion yuan allocated for new loans for the full year which is closed to being utilized in the first quarter itself.

The total new loans off-take started increasing from January when it recorded an increase to 252.1 billion yuan ($36.9 billion), in response to the government efforts to boost the economy. (See: China's ICBC reports rise in off-take of new loans in January)

In the first quarter of this year, China, unveiled a 4.58-trillion yuan ($670 billion) incentive in the form of new loans to boost growth. Earlier in November China had announced a $4-trillion-yuan ($585 billion) stimulus package to combat the global downturn.(See: China eyes fresh stimulus to jumpstart economy)

The country's financial institutions and enterprises would digest the huge amount of new loans in the following months, the report said. It also said that the central bank would continue to instruct financial institutions to extend new loans, despite the earlier surge.

The pick-up in bank lending is conducive to stabilise the financial market and boosting market confidence, the report said.

The quarterly report also dispels concerns of a huge supply of loans in the first quarter could cause rise in property and other assets' prices leading to possible inflation.

The bank also advised lenders to improve credit quality to evade a possible rebound in bad loans.

The new lending from commercial banks was mainly focused on government-backed projects, the central bank said. More bank loans were encouraged to small and medium-sized projects as they play an important role in the national economy and in increasing employment.

According to analysts the policy dismisses speculation of increase in interest rates with the economy stabilising. "Positive changes have taken place in the economy and the situation was better than expected in the first quarter. But the foundation for a rebound is not yet solid," the report said.

The bank's statement confirms what prime minster Wen Jiabao said in Thailand on 11 April on the sidelines of the ASEAN Summit that the Chinese economy is showing signs of positive change from the ongoing global economic downturn.

The credit off-take needs to increase further in order to offset the impact of a worsening global economy, the report said.

The report added that the quarter-on-quarter growth was improving, compared to the fourth quarter of last year, without divulging any detailed data.

China's economy grew 6.1 per cent year-on-year in the first quarter, the lowest rate in 10 years, down from 9 per cent in the fourth quarter last year.(See: China's first quarter GDP at 10-year low)

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

The report said the country still has to battle against the financial crisis that is unfolding and a collapse in external demand is hurting exports. The bank also cautioned that overcapacity and insufficient demand may drive prices lower in the country with the world economy still in a downturn.

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.

It added that continued fall in prices may become less probable 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 quarterly report said.

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

It made references to the quantitative easing policy adopted by the US, Japan, Britain and Switzerland of pumping cash into their economies to stimulate growth.