By Xi Si and Hu Rongping (席斯, 胡蓉萍)
News, page 2
Issue No. 532, Aug 15, 2011
Translated by Zhu Na    
Original article: [Chinese]

The central bank is blocking an attempt by the Ministry of Finance to move more of its cash to deposits at commercial banks, where interest rates are more attractive, since it fears that the move would stoke inflation.

The vast majority of the central government’s 1.5 trillion yuan is held at the People’s Bank of China, but the country’s four commercial banks also look after a small slice of the savings, in the form of short-term deposits. Those banks compete through a monthly tender process for the right to take on the deposits. In 2010, the size of these monthly auctions averaged around 40 billion yuan, but has now fallen to around 30 billion yuan.

The central bank was unhappy that that the ministry channeled so much cash into commercial banks during 2010, and this year’s monthly deposit auctions would be much larger if it weren’t for objections by the central bank, a person familiar with the matter told the Economic Observer.

The commercial banks, which accept the central government cash as three-, six- and nine-month deposits, have been offering higher and higher interest rates to win the treasury tenders. China’s “big four” commercial banks refer to the Bank of China, the China Construction Bank, the Agricultural Bank of China and the Industrial and Commercial Bank of China.  

The annualized rates that they offered in the July tender reached 6%, up from 5.4% in December, and more than double the rate at the beginning of 2010.

Their interest payments totaled 7.4 billion yuan in 2010, compared to 1.7 billion yuan in 2009.

The central bank only pays a fixed interest rate of 0.36% on treasury deposits. The finance ministry needs agreement from the bank for every investment decision concerning its 1.5 trillion yuan in savings.   

The People’s Bank has been trying to rein in bank lending since the beginning of 2010, when consumer prices began to rise more quickly after a huge government stimulus package. An official told the Economic Observer that the Finance Ministry’s policy of cash management, whereby it seeks to maximize returns on idle funds, is inappropriate at a time when inflation is running at 6.5% and restrictions have been placed on both real estate purchases and corporate loans.

The finance ministry argues that it is common practice for finance ministries around the world to seek the best returns on treasury deposits and says that its cash otherwise sits on account at the People’s Bank, exacerbating a liquidity shortage for borrowers elsewhere in the economy.

“The Ministry of Finance isn’t managing these funds for its own benefit, but to reflect the time value and utilization vale of treasury funds,” a person close to the ministry said, adding that the effect of monetary policy will be minimal since the amounts deposited at commercial banks are relatively small.

 Local governments

Local governments hold a total of around 2 trillion yuan on deposit, most of which is held in regional branches of the People’s Bank of China. Unlike the central government, they don’t have agreed policies for cash management.

Even so, in the absence of any clear guidelines or regulations, some local governments hold deposits at commercial banks regardless. This makes the process much more open to corruption.

 “There is no system for conducting tenders [for banks to win local government deposits], and so it will be determined by local governments as to which bank they choose,” someone familiar with the matter told the Economic Observer.

In Shanghai for example, one district holds part of its budgetary revenue at the Agricultural Bank.

In 2010, the deputy director of Jiangsu’s finance Bureau Zhang Meifang (张美芳), was detained and put under investigation or “shuanggui” - a form of extra-legal detention that is usually used on members of the Chinese Communist Party that are suspected of corruption - on suspicion of accepting kickbacks from the bank at which some of the provinces non-tax revenue was deposited.

 This story was rewritten for publication in English by Will Bland

 Links and Sources

The Economic Observer: Jiangsu Official Suspected of Using Kickbacks to Purchase Seven Homes