Friday, March 7, 2008

Subprime Debt Risk Limited for Chinese Banks- Zhou Xiaochuan

by Richard York

The threat of the subprime mortgage crisis looms large over the global economy and every nation is striving to do its best to avert the possible effects of a possible US recession. According to Central Bank Governor of China, Zhou Xiaochuan there will be a limited blow to the Chinese banks of the US led subprime debt crisis and the bottom line of the Chinese banks will not experience any significant blow. However the central bank governor Zhou Xiaochuan had a word of caution and said that watchfulness on the part of the banks was very necessary because there still remain many suspicions as to how the debt crisis opens up and what will be its effects for China. China currently faces rising inflationary pressures.

The governor during a press conference on the occasion of the annual gathering of the National People’s Congress, the top legislature of China said that the Chinese economy can experience more indirect blow from the US led subprime mortgage crisis. He further said that the effects of the crisis cannot at all be taken too lightly since what is in store is far beyond the experience of the country. According to a latest report that appeared in the Capital Week Magazine six of main commercial banks of China had to suffer a loss of about 4.9 billion Yuan that is $686 million in the subprime market of the US. The loss these Chinese banks suffered had a one percent share in the overall profit that these banks made in 2007. The central bank governor while speaking about the connection that inflation and currency value has said that prices can be controlled by a quicker gain of the Yuan however this measure cannot be the leading measure of taming inflation.

In the opinion of some economists the quick gain of the Chinese Yuan can help in cutting down trade surplus which is supposed to be the major cause for the excessive liquidity at present and which is also responsible for increasing prices. In the foreign currency terms the greater value of the Yuan will make exports costlier. Mr. Zhou said that it is mainly the forces in the market that have their effect on deciding the exchange rate. The Chinese policy makers have allowed the Yuan to gain in value at a stable pace and this way they have given their currency regime more flexibility. When the Yuan was unpegged it has climbed about 12% since July 2005.

The central bank governor further said that government policies and a tight monetary policy are mainly responsible for curbing inflation. The governor also pointed out that the Chinese Premier Wen Jiabao in his Government Work Report, delivered at the beginning of the NPC annual session on Wednesday referred to nine actions to have efficient supply and control too much demand as the ways to make prices stable. In order to soak up excess liquidity the central bank of China in the last year increased the reserve ratio for as many as ten times and it also increased interest rates for almost 6 times.

 

 

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