China Loses Control Of Its Bank System

The People’s Republic central government is supposed to control everything in China from child birth rates to internet access. The effectiveness of that control was questioned, however, when the country released new data on bank loans. The People’s Bank of China reported that the country’s “new loans exceeded estimates in June and foreign-exchange reserves jumped by $153 billion in the second quarter,” Bloomberg reported. This is despite a rise in rate increases and new reserve requirements for the nation’s banks. Those requirements are now an astronomic 21.5%.

China has begun to lose the reigns of its economy. This has fueled concerns that inflation and low overseas demand for finished goods could contribute to a period of modest growth and high inflation. Bank activity is not the only cause of inflation. Food prices are up as much as 15%, and the cost of some meat products has recently risen by 25% or more over the last year.

The bank data shows the challenge that the central government has as it tries to affect the actions of tens of thousands of financial firms spread across the country’s large geography. The nation’s 22 provinces do not all share the same needs for capital. As a matter of fact, country economists and outside lenders believe that part of the increase in lending is to local governments themselves. Leverage in these regions has reached critical levels. Moody’s reported last month that China’s National Audit Office has badly underestimated money borrowed by local governments and put the figure as high as a quarter of the country’s GDP.

Since China cannot control commodities prices, which are based largely on activity outside the People’s Republic, monetary policy is its most important weapon as it tries to keep its economy stable. It is clear from the new People’s Bank of China data that the government’s power over the critical bank and monetary systems no longer exists in a form that can slow lending.

Douglas A. McIntyre