China's Central Bank Says Economy Beating Forecasts, Pledges `Ample' Cash

China Pledges Ample Supply of Money to Spur Recovery
(Update2)

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May 6 (Bloomberg) -- China’s central bank said the economy performed “better than expected” in the first quarter and pledged to keep money flowing into the financial system to sustain growth.

The People’s Bank of China will ensure an “ample” supply of money, it said in a quarterly monetary-policy report posted on its Web site today. New lending surged sixfold to a record in March as banks supported the government’s 4 trillion yuan ($585 billion) stimulus package.

The recovery’s foundations aren’t solid, with new lending overly concentrated on government projects at the expense of small businesses, the central bank said. The report highlighted “positive changes” in the world’s third-biggest economy, echoing remarks by Premier Wen Jiabao on April 11.

“The momentum is gathering for quite a strong recovery in growth in the second half of the year,” said Peng Wensheng, an economist with Barclays Capital in Hong Kong.

The pledge to keep money flowing contrasted with the bank’s concern that monetary easing in other major economies risks triggering inflation, currency devaluations and a “big consolidation” in bond markets.

“A policy mistake made by some major central bank may bring inflation risks to the whole world,” the People’s Bank of China said in the report.

Deflation Threat

China’s quarter-on-quarter growth in gross domestic product improved significantly, the central bank said, without giving figures. The threat from deflation is easing, it said. China’s economy grew 6.1 percent in the quarter from a year earlier, the slowest pace since at least 1999.

Surges in lending and investment and an expansion in manufacturing in April have added to signs that the economy is starting to recover. China is battling rising unemployment, a collapse in exports and weakness in the property market.

The central bank pledged to make “flexible” use of multiple monetary-policy tools. Credit growth will need to increase if the global economy worsens, the report said.

New lending rose to 1.89 trillion yuan in March after the government dropped quotas. The central bank cautioned bad loans may rebound and said lenders need to assess local governments’ abilities to repay debt.

“They are flagging potential risks from the very stimulatory policy that has been put in place since November,” said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong. “The People’s Bank of China will probably be the one central bank that actually has to tighten monetary policy in the second half of this year.”

Borrowing Costs

The central bank has kept the one-year lending rate
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unchanged at 5.31 percent this year after five cuts in 2008 as the global financial crisis deepened. Its next move may be to increase rates next year, Tao Dong, chief Asia economist at Credit Suisse Group AG in Hong Kong, said today.

The nation is at risk of a stock market “bubble” that may burst as investor confidence in the recovery weakens and bank lending slows, according to China Galaxy Securities Co., the nation’s largest brokerage.

The Shanghai Composite Index
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has surged more than 50 percent from last year’s low on Nov. 4.

Today’s report echoed a bank statement last month. It reiterated pledges to keep the yuan “basically stable” and monetary policy “moderately loose” and said China can maintain stable and relatively fast growth.

To contact the reporters on this story: Kevin Hamlin in Beijing at [email protected]