Finance news

China's debate on how far the central bank should go to spur growth surfaced at a conference in Beijing today when a former deputy governor and an economic planning official took different stances.

“The central bank should allow greater room for medium and long-term lending rates to float downward to help boost key projects such as railways,'' said Cao Wenlian, a deputy director at the National Development and Reform Commission's fiscal and financial affairs department.

Wu Xiaoling, the former deputy governor, emphasized strictly controlling money supply because of “serious'' inflationary pressure, while accepting “relatively loose'' fiscal policies.

The comments reflect differences between government agencies over monetary policy as an export slowdown and a global credit crisis threaten to undermine the world's fastest-growing major economy. The central bank is concerned that inflation will rebound after easing to a 14-month low in August.

The debate in China has become “more polarized,'' said Kevin Lai, an economist at Daiwa Institute of Research in Hong Kong. “They each have a different diagnosis of the problem.''

China cut borrowing costs for the first time in six years on Sept. 15 and lowered the amount of reserves that smaller banks must set aside. The deposit rate was left unchanged.

Central bank governor Zhou Xiaochuan said this month that unlike other government departments, the central bank's main concern was inflation.

`Moderately Tight' Policies

Wu, the deputy director of the Financial and Economic Affairs Committee of the National People's Congress, China's legislature, advocated “moderately tight'' monetary policies.

In contrast, Cao said: “Monetary policy can't just target inflation while ignoring growth.''

While Cao wants more lending for infrastructure, Wu cautioned that making fiscal policies too loose would risk “overheating'' in investment pay day loan.

They agreed that the government should boost consumption.

“The NDRC traditionally is more pro-growth while the central bank is more concerned about price stability,'' said Huang Yiping, chief Asia economist at Citigroup Inc. in Hong Kong. It's unusual for policy differences to be aired in a public forum, he said.

`Speaking Different Languages'

“The issue is probably becoming more serious,'' said Huang. “Their differences are almost public knowledge, but speaking different languages at the same conference is another thing.''

The central bank reduced the one-year lending rate to 7.20 percent from 7.47 percent. It lowered the reserve-requirement ratio for smaller banks to 16.5 percent from 17.5 percent.

Overall lending remains controlled by credit quotas imposed by the central bank, said Wang Tao, an economist with UBS AG in Beijing.

“Once they are more concerned about the slowdown in the real economy they will relax the credit quota as well as having a fiscal stimulus,'' she said.

In July, the central bank reduced restrictions on how much banks can lend by raising 2008 credit quotas for national banks by 5 percent and regional lenders by 10 percent, according to reports by Goldman Sachs Group Inc., BNP Paribas SA, and China Merchants Bank Co.

The central bank has urged financial institutions to channel more money to farmers, small businesses and reconstruction work after the May 12 earthquake in Sichuan province.

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