Central bank official warns of inflation, bad loan risks
The head of the People's Bank of China, the nation's central bank, has warned that the risks of excessive liquidity, inflation, asset bubbles and bad loans will "increase significantly," in comments published Thursday.The remarks by Zhou Xiaochuan at a meeting between the International Monetary Fund and central bankers in Shanghai Monday may provide some insight into the reasons that led the central bank to hike interest rates.
In a surprise move Tuesday, the People's Bank of China announced it would raise one-year lending and deposit rates for the first time since 2007 as Beijing ramped up efforts to curb soaring property prices and bank lending.
"There is still relatively strong momentum for domestic credit to keep expanding," Zhou said in a transcript of his speech posted on the central bank's website.
"Cross-border capital flows contain potential risks (and) macroeconomic risks including excessive liquidity, inflation, asset price bubbles, cyclical rises in bad loans will increase sig-nificantly."
Zhou added that the "asset quality and risk-resisting capabilities of the financial industry will face serious tests."
The decision to raise rates came as inflation, property prices and bank lending rose in September, defying official efforts to dampen all three and fuelling fears of a damaging bubble and a potential new crop of bad loans.
Analysts have warned that higher interest rates could increase the volume of speculative foreign capital flowing into China, which Beijing has blamed on the loose monetary policies of the United States.
This means the central bank has to work harder as it tries to keep a lid on its currency, buying the dollars flooding into China in search of a relatively higher yield to prevent the yuan from rising too quickly.
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