Chinese banks taking on intolerable risks

Financial reforms needed to reduce excessive risks concentrated in banking sector.

Zhou Xiaochuan, Governor of the People’s Bank of China, the central bank, said the high ratio of money supply to Gross Domestic Product in China means risks are excessively concentrated in the banking sector. He said this demonstrates the need for financial reform.

Zhou noted that the quite high level of M2 results from China's high savings rate. China's ratio of M2 to GDP rose to 188% of GDP last year from 154% in 2002.

China’s M2 level, however, shows that China remains reliant on indirect finance bank lending as opposed to direct finance such as equity and bond issuances. China has set a target of 13% M2 growth this year compared to last year's 14%.

Zhou believes improvements to China's securities and insurance markets should help lower the ratio over the medium- to long-term.

China's M2 growth is normally slightly higher than nominal GDP growth to include the monetization of certain parts of the economy as economic reform progresses.

China's wants a 3.5% rise in consumer-price inflation and a 7.5% rise in real, inflation-adjusted GDP this year, or a nominal GDP increase of 11%.