BIZCHINA / News
Securitization to help China reduce excessive liquidity
(Xinhua)
Updated: 2007-04-12 13:28
Large-scale securitization by banks could soak up excess liquidity and
assist macro-economic management in China, according to a report released
by Standard & Poor's.
Excessive liquidity in the banking sector is a major problem for the
country's economy, it said.
The report, "Absorbing Excessive Liquidity In China Through Asset
Securitization", says the Chinese authorities are resorting mainly to
lifting interest rates to deal with investment bubbles induced by excess
liquidity.
However, most of the liquidity is caused by the trade surplus and "hot
money" used to speculate on the renminbi. Interest rate hikes are futile
and may even attract more hot money, says the report.
"Developing the securitization market provides an attractive alternative
solution," said Joseph Hu, managing director and China country manager at
Standard & Poor's.
"Most of the money that investors use to buy securitized products is from
bank deposits," Hu said. "Issuing securitized products leads to
reductions in assets and liabilities in the banking industry. It absorbs
liquidity."
In securitization, banks sold their loan and credit assets to investors,
squeezing the money supply, said Hu.
The report concludes that excess liquidity reflects a deep-rooted
contradiction in the economic structure - an underdeveloped bond market.
To solve the problem, the central bank should build an advanced bond
market to absorb liquidity while implementing controlling policies.
"The Chinese economy has maintained a robust trend of high growth, low
inflation and low interest rates, but the skyrocketing prices of
financial assets reveal the contradiction between the accumulation of
wealth and the supply of financial assets," Hu said.
"If people concentrate investments excessively on stocks, the risks are
self-evident," Hu said. "Investors not only face the risk of
concentration, but also the lack of other investment products, especially
when the market lacks a benchmark rate of investment return."
These factors made the stock market vulnerable to manipulation and
developing the bond market would help expand direct financing and
strengthen capital market stability, he said.
(For more biz stories, please visit Industry Updates)
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