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China to increase supply of money to boost economy

business Updated: Dec 14, 2008 11:12 IST
China to increase supply of money to boost economy

China said it plans to increase the amount of money circulating in its economy next year in a new effort to spur consumer spending and shield the country from a global downturn. Saturday's announcement by the country's State Council, or Cabinet, comes on the heels of a multibillion-dollar economic stimulus package announced last month that calls for injecting more government money into the economy through spending on construction and other projects.

There are mounting signs that China's economic slowdown is sharper and deeper than expected. Exports fell in November for the first time in seven years and the industry minister warned Friday that worse was to come.

China will increase its money supply by 17 per cent next year, the Cabinet said in a statement on its Web site. It said that would be 3 to 4 percentage points above the total growth of economic output and consumer prices.

Increasing the supply of money is aimed at stimulating domestic economic activity and spending by making more credit available to encourage consumers and companies to borrow.

"We must strengthen the role of the financial sector in supporting economic growth by better implementing an active fiscal policy and moderately easing monetary policy," the Cabinet statement said.

The growth rate of China's money supply slipped this year as business activity and bank lending slowed.

The growth in China's broadest measure of money supply shrank from 16 per cent in August to 15 percent in November, according to the central bank. That measure, known as M2, includes cash and bank deposits.

The Cabinet also decided to increase by 100 billion yuan ($14.6 billion) the amount of loans for the country's policy banks this year and suspend and reduce the sale of some central bank securities, the statement said.

The central bank has been draining billions of dollars from the economy every month to reduce pressure for prices to rise as revenues from China's booming export industries flood through the economy.

The government said it would stop sales of three-year central bank notes and reduce sales of one-year and three-month bank notes, but gave no other details.

With economic growth forecast at 9 per cent and inflation at about 6 percent this year, China's money supply growth has just kept pace with growth in commercial activity. With both growth and inflation forecast to be lower in 2009, the planned expansion in money supply should be much larger than is needed to maintain commercial activity.

China's industry minister Li Yizhong said Friday that the government will spend 15 billion yuan ($2.2 billion) to subsidize loans to companies to improve technology and cut energy use. Li said Beijing might buy surplus steel to help producers as demand plummets, as well as cut taxes to spur auto and real estate sales.