China targets excess liquidity in hope of solving economic challenges

FE Team | Published: June 29, 2007 00:00:00 | Updated: February 01, 2018 00:00:00

BEIJING, June 28 (CEIS): The Chinese government unveiled two dramatic measures yesterday to solve its economic dilemmas with a massive issue of special treasury bonds to buy its ballooning foreign exchange reserve and cutting the country's longstanding interest tax on personal savings.
Both are intended to harness the excess liquidity in the domestic economy, said Finance Minister Jin Renqing. The cash in circulation has been blamed for the skyrocketing rise of the stock market and real estate prices that hint at an emerging economic bubble.
The two bills-one authorising the ministry of finance to issue 1.55 trillion yuan of special T-bonds for the purchase of 200 billion US dollars of the forex reserve and the other authorising the State Council to suspend or cut the interest tax on personal savings-were tabled with the national legislature for review Wednesday.
"China's excessive liquidity, as a result of unbalanced international trade and economic order, has also given rise to constant trade friction with foreign countries and inflation risks at home," said Yin Jianfeng with the Finance Institute of Chinese Academy of Social Sciences.
The proposed T-bond issue, the largest in China's history, would be very noticeable in its intended role of withdrawing currency from circulation, and the proposed cut or suspension of the tax on personal savings interest would make saving more attractive, Yin said.
Another intended goal of the T-bonds was to relieve the government of the burden of its increasing foreign exchange reserve, which stood at 1.2 trillion US dollars by the end of March, up 135.7 billion US dollars from the end of 2006.
According to the International Monetary Fund standard, forex reserves bought through T-bonds are no longer counted in the national foreign exchange reserve, and once the transaction is completed, a sixth of China's forex reserve will be in the hands of market players.
"Without a sufficient scale, the intended role of draining liquidity may not be obvious," he said. "Because China's forex reserves were likely to continue to rise, and the central bank would face more pressure in coping with excessive liquidity even after recent measures to withdraw currency from circulation."
The bond issue, whose dollar purchase would be managed by an forex investment company still in the making, will help domestic enterprises do business abroad and enhance national economic competitiveness, Jin said.
The proposed cut or suspension of the 20 per cent interest tax on savings is seen as a means to dampen public enthusiasm for the stock market, which the government clearly wants to control.
In recent months, China has seen large sums of money flow from savings accounts into stock trading accounts. Household deposits posted the largest ever monthly drop in May, down 278.4 billion yuan, according to central bank statistics.
"A bull stock market and soaring housing prices made many people realize that the yield on bank deposits was simply too low," said Huang Fuguang, a finance professor at Tianjin-based Nankai University.