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Monetary Growth May Push up Interest Rate

China's monetary growth quickened in the past two months as new loans accelerated despite last year's policy actions, increasing inflationary pressures and the possibility of an interest rate hike.

The People's Bank of China (PBOC), the central bank, said on Friday broad money M2, which covers cash in circulation and all deposits, rose by an annualized 19.8 per cent to 22.71 trillion yuan (US$2.73 trillion) at the end of February.

The pace was 1.3 percentage points faster than that recorded both one year and one month earlier, and outstripped a 17 per cent official growth target for this year.

The growth in new renminbi loans, a major driver of the money supply, also reversed a hard-won downtrend near the end of last year, growing by 55.3 billion yuan (US$6.7 billion) more than a year earlier.

The PBOC did not disclose how much was lent in the two months, but said the outstanding renminbi loans were 16.38 trillion yuan (US$1.9 trillion) at the end of February, up 20.7 per cent on an year-on-year basis, 0.6 percentage points faster than the previous month.

The central bank attributed the quickened annualized pace in monetary growth to the later arrival of the Chinese Lunar New Year, a period of relatively faster monetary expansion as people spend more. It fell in January this year but in February last year.

China's money supply rose by an expeditious near 20 per cent last year, pushing up inflationary pressures and prompting discussions about a possible interest rate increase this year.

On Thursday, PBOC Governor Zhou Xiaochuan ruled out the possibility of an interest rate hike this month, saying the bank would wait to see the lagged effects of last year's monetary policy actions.

The central bank tightened monetary policy last year in an attempt to cool down the rapid rises in new loans, raising bank reserve requirements by 1 percentage point in September.

Subsequently, loan growth abated slightly near the end of last year, which cheered central bankers.

(China Daily March 13, 2004)

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