china says subprime merits caution on liberali

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    The Chinese are smart in not following the US.


    BOAO -- China has concluded from the US subprime crisis that financial regulators should not easily loosen supervision or blindly follow free-market practices, its top banking regulator said.

    The comments from Liu Mingkang, chairman of the China Banking Regulatory Commission, come as Washington tries to coax Beijing towards a market-driven economy and higher consumption that can play a larger role in stabilising the global economy.

    Mr Liu said his agency would strictly follow cautious supervision procedures over the market, banking institutions and their products to prevent a problem similar to the US subprime mortgage loan crisis from occurring in China.

    "The United States has for a long time been advocating free-market capitalism, believing the market can allocate resources effectively without government interference. But this is not really the case," Mr Liu told a small group of reporters.

    "Sometimes the market does not work and if you wait until then to correct it, the costs are usually tremendous."

    Mr Liu said the CBRC would make sure Chinese banks do not lower standards when extending housing loans and apply greater scrutiny to borrowers buying more than one home.

    The agency would also prevent banks from lending to companies with few of their own funds and too high a debt ratio.

    Mr Liu said China's asset-backed securities market is only about 35 billion yuan ($US5 billion) currently, accounting for only a tiny proportion of the nation's 30 trillion yuan bank loan market, virtually ruling out the possibility of a credit crisis similar to the one in the US

    This month, US Treasury Secretary Henry Paulson visited China and tried to soothe concern there over the US economy.

    He also promoted the road to a market-driven economy where consumers can borrow more easily and need to save less for emergencies, and can buy more goods: "For China, the challenge is to save less and consume more," he said.

    More outflow channels

    Turning to Chinese banks' investments in overseas stock markets on behalf of clients, Mr Liu told Reuters his office is considering channelling bank customers' funds to more mature markets such as Australia and Germany.

    Chinese banks can now use clients' money to buy stocks and mutual funds in the United States, Hong Kong, Britain, Japan and Singapore under the so-called Qualified Domestic Institutional Investor (QDII) scheme.

    But turbulence in the overseas stock market and a rising yuan have made QDII products less attractive than domestic investments in the past.

    Four major QDII stock funds from Chinese mutual fund firms that raised $US4 billion each from domestic investors late last year have fallen sharply below their par value amid a turmoil in the global financial markets.

    "But our job is to set up the platform for banks to play. They should learn how to make it profitable," Mr Liu said.

    At the end of 2007, 16 banks were offering 262 QDII funds into which investors had put 41.4 billion yuan ($US5.91 billion) and $US1.2 billion.

    Commenting on Beijing's credit controls to cool the economy, Mr Liu said regulators did not want to see sharp drops in lending.

    "We want the loan growth to slow gradually and not suffer big ups and downs. The only sector in which we want to see a fast credit rise is agriculture," he added.

    Expansion in China's broad M2 money supply and credit slowed in March, falling back from a surge at the start of the year when banks rushed to put loans on their books to take advantage of new lending quotas.

    The central bank said on Friday that the slowdown showed its shift to a tighter monetary policy, undertaken in order to curb soaring inflation, was bearing fruit.

    "It is moving in the direction we were expecting and the macro controls are biting now," Mr Liu said.
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