RGE - China’s future?

China’s future?
Brad Setser | Sep 18, 2006
The Bank of Korea is taking ongoing losses on its reserve holdings.

South Korea's central bank may have a loss of as much as 3 trillion won ($3.1 billion) in 2006 because of interest costs from [domestic sterilization] bond sales, the opposition Grand National Party said, citing a Bank of Korea report.

``We judge that there is a possibility that the central bank will record a loss between 2.5 trillion won and 3 trillion this year,'' said Lee Jeong, an aide to opposition party lawmaker Yun Kun Young, who sits on parliament's economics and finance committee.

Still, the central bank said interest revenue will be larger in the second half of the year than the first. That revenue should help prevent the loss in 2006 from growing beyond last year's, the bank said in a statement today.

Losing money on your reserves isn’t unusual. In most emerging economies, domestic interest rates are higher than US and European (let alone Japanese) rates. Korean policy rates aren’t really all that high – 4.5%. They just aren’t super low.

But the reported losses must include valuation losses from won appreciation.

China has avoided these problem. The RMB hasn’t been allowed to move much (there is a reason no one wants to hedge … the RMB hasn’t been that volatile, and there isn’t much risk it will fall) Base money is very high – which helps the central banks profits. And China has intentionally held domestic interest rates well below US rates to discourage speculation.

That helps keep the PBoC profitable. But it creates other problems. Like too much bank lending …

Comments

China holds interest rates on deposits low, but there are no controls on interest rates on lending, so I'm not sure how those controls encourage lending.

The controls on deposit interest rates exist as something of a tax in order to get the banks solvent. It's also to prevent the banks from engaging in risky activity in order to boost depositor returns, which was a big problem with the ITIC's before they were put under the control of the banking regulators.

There are parts of the system which look very much like the US financial system of the 1960/70's with controlled interest rate passbook savings and zero interest checking accounts.

Written by Joseph Wang on 2006-09-18 16:58:00
If the interest rate on deposits is low, the lending rate would also be low (relatively speaking after adding the margins) in a competitive market. Surely that would encourage lending right?

Written by JW on 2006-09-18 18:50:25
there is a cap on deposit rates, and a floor on lending rates -- so more or less a guaranteed spread. banks can charge more than the base lending rate, but cannot charge less (At least not easily, from what I have read). most loan rates cluster around that rate. and since the banks are very liquid, and lending out funds earns more than holding PBoC bills, they have strong incentives to lend in the absence of administrative guidance.

Written by bsetser on 2006-09-18 22:19:43

http://k-tai.impress.co.jp/cda/article/news_toppage/31074.html
便利になりそうで助かります。実はつかいづらいと思っていました。

http://robertreich.blogspot.com/2006/09/future-of-american-automaking.html
Big Threeではなくsmall threeですか。元労働長官のブログを
http://economistsview.typepad.com/economistsview/2006/09/reich_detroits_.html
でしりました。