China to adopt tight monetary policies

BEIJING—China concluded its three-day 2007 Central Economic Work Conference on Wednesday with a pledge to shift its monetary policy from “prudent,” an approach it has followed for the last ten years, to “tight.”
The conference, an annual event initiated more than a decade ago, serves as a crucial mechanism for the Communist Party of China (CPC) Central Committee and the State Council, the cabinet, to make policies to govern the Chinese economy. China will maintain a “prudent” fiscal policy for the coming year.
Various monetary instruments should be used to regulate liquidity and to strictly control the size of loans and frequency of credit extension, so as to better regulate domestic demand and balance international payments, said the conference. China raised interest rates five times and reserve requirement ratio nine times this year.
The conference said that with a prudent fiscal policy and a tight monetary policy, China will be able to achieve “the Two Prevents” in the coming year: to prevent economic growth developing from rapid to overheating, and to prevent price rises evolving from structural to evident inflation.
“A tight monetary policy can develop a progressive effect, which will help curb the overheating in markets of assets, including equities and real estate, and then cap price rises,” Cao Honghui, an economic researcher with the Chinese Academy of Social Sciences (CASS), said to Xinhua.
China has been implementing a prudent monetary policy since 1997. From 1998 to 2002, the country increased money supply to counter deflationary pressure. From 2003 to 2007, the monetary policy began to tighten in order to help address changes in economic development, including rapid growth in credit extension, investment and foreign exchange reserves.
“The new policy reflects the accurate judgment by the central government on China’s current economic situation, which is under pressure from further price rises and unduly fast loan growth,” Peng Xingyun, a senior researcher with the Research Institute of Finance under the Chinese Academy of Social Sciences, told Xinhua. The country’s consumer price index (CPI) rose a decade-high 6.5 percent in October, well above the government-set alarm level of three percent. Observers here said the major inflation indicator will most likely rise to a new high in November.
In the first 10 months, Renminbi-denominated loans were 1.1 times the amount for the whole of last year. By the end of October, money supply growth was 18.47 percent, 1.53 percentage points higher than the 2006 end level. Fixed-assets investment growth in urban areas was 0.2 percentage points higher than the year-earlier level.
Yu Yongding at CASS research institute of world economy and politics said that four percent was the CPI ceiling that China could tolerate. If the inflation measurement increased higher it would send a signal to the central bank that a tight monetary policy was necessary. The Central Government urged to “moderately tighten money supply” on the basis of prudent monetary policy in June 2007, the first time the central government used the word “tighten” for monetary policy since 1997.
Observers here believed China would continue to face high inflationary pressure next year. In international markets, oil prices would continue their exposure to high volatility and grain prices would keep rising. In the domestic market, high food prices, a major contributor to the country’s CPI growth, would likely force up labor costs and then production cost in different sectors.
Prof. Song Guoqing predicted that a sixth interest rate rise was around the corner. “Next year, the central bank will likely grant loan quota to commercial banks quarter by quarter, instead of year by year, which will better control credit,” he said.
The observers said it was noteworthy that while the monetary policy went tighter, the fiscal policy would remain prudent. “Considering requirements of improving people’s livelihood, major construction projects, economic restructuring and of energy saving and emissions reduction, the country’s fiscal expenditure will remain huge next year. It is unsuitable for the fiscal policy to turn to tight,” said Prof. Zhu Qing of the business school of the prestigious Renmin University.
The State Information Center forecast China’s GDP growth at 11.4 percent for the whole of this year and at 10.8 to 11.3 percent for 2008. According to its prediction, the country’s CPI will rise 4.7 percent this year, 2.9 percentage points higher than the previous year, and go up 4.5 percent for next year. The exports will increase by 25.7 percent, and imports by 20 percent, with the trade surplus forecast at 268 billion U.S. dollars, 90.5 billion U.S. dollars higher than the 2006 level.—Xinhua