China vows to tighten monetary policy in 2011

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China pledged Friday to tighten monetary policy next year -- a sign that new interest rate hikes are imminent, analysts say, as the world's second-largest economy steps up its battle against inflation.

The Communist party's politburo decided to shift its stance from "relatively loose" to "prudent" at a meeting chaired by President Hu Jintao, the Xinhua news agency reported.

The politburo said it should "implement an active fiscal policy and a prudent monetary policy, to increase the focus, flexibility and effectiveness of macro-economic adjustments," the report said.

"We must clearly see that the functioning of China's economy is facing some prominent contradictions and problems, the environment for development is more complicated and our task is arduous," Xinhua quoted Hu as saying.

"We must be more active in dealing with the relationship between stable economic growth, adjusting the economic structure and managing forecasted inflation," he said in a separate meeting after the politburo gathering.

A senior official at China's central bank last week warned that inflationary pressures were building because of flows of capital into the country and expectations of a revaluation of the yuan.

The nation's consumer price index rose 4.4 percent year-on-year in October, well above the government's full-year target of three percent, with the prices of 18 types of vegetable increasing more than 60 percent.

Analysts said the government's announcement signaled a new phase in the country's efforts to curb spiraling prices.

"It's a very clear signal that the rate hikes are imminent. We're forecasting one by the end of the year and another three in 2011," Brian Jackson, a senior strategist at the Royal Bank of Canada, told AFP.

"The rates are too low given inflation. They've only moved rates by 25 basis points since the start of 2009 so this looks increasingly inappropriate for the current situation."

State media has previously reported the Communist leadership was to adopt a "prudent" monetary policy compared with the expansionary stance adopted over the past two years to combat the impact of the global financial crisis.

Beijing unveiled a four-trillion-yuan (586-billion-dollar) stimulus package in the wake of the crisis and opened the credit valves, which led to the volume of new loans nearly doubling to 9.6 trillion yuan in 2009.

These loans were mainly used to increase investments and caused a boom in property prices. Policymakers now fear a damaging bubble in the real estate sector and a potential new crop of bad debts.

Ever fearful of inflation's historical potential to spark unrest in China, Beijing has ordered a range of steps to ensure adequate supplies of key goods and offer financial help to the most needy.

The central bank hiked interest rates in October for the first time in nearly three years.

Last month, Beijing raised the amount of money that lenders must keep in reserve for the fifth time this year.

"We've already seen the beginning of a tight monetary policy, with reserve requirement hikes and interest rate hikes," Stephen Green, an analyst at Standard Chartered in Shanghai, told AFP.

"We think there's more to come," Green said, predicting a rate increase could come "anytime in the next few weeks".

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