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China acts to rein in prices and avert asset bubble

High-level meeting decides to shift monetary policy from ‘prudent’ to ‘tight’ next year

IN BEIJING – CHINA moved to cool its sizzling economy and rein in rising prices when it said yesterday that it would shift its monetary policy from ‘prudent” to ‘tight’ next year.

China’s leaders made the announcement at the close of an annual Communist Party economic conference attended by President Hu Jintao, Premier Wen Jiabao and others.

The policy for the coming year was outlined amid fears that food- and fuel-price hikes are threatening social stability across the country.

The size of loans and frequency of credit extension would be ‘strictly controlled’ through ‘various monetary instruments’, concluded the three-day Central Economic Work Conference.

No details were given by official state media, but analysts predicted that these controls would come in the form of a sixth interest-rate hike and yet another raising of the minimum reserve requirement for banks, which would reduce the amount available for lending.

The announcement yesterday showed the government was paying ‘a lot of attention’ to two issues – inflation and the bubble in asset prices, according to a Beijing-based economist with the Chinese Academy of Social Sciences.

‘This really is extremely important,’ Mr Zhang Ming was quoted as saying by Agence France-Presse.

China’s economy is expected to grow by 11.5 per cent this year, with a government think tank recently predicting just a marginal slowing next year to about 10.8 per cent.

The primary task of China’s economic policy next year is ‘to prevent the economy from becoming overheated and to guard against a shift from structural price rises to evident inflation’, said the official Xinhua news agency.

China’s red-hot economy is flush with excess cash, caused by factors such as China selling far more exports abroad than what it imports from the rest of the world.

By the end of October, money supply growth was 18.47 per cent, 1.53 percentage points higher than the 2006 end level.

Beijing is worried at how having more money in the system is driving up housing and consumer prices.

But it had been reluctant to put too much of a break on lending and investment for fear of slowing down economic growth and employment.

The new attempt to tighten what has been a ‘prudent’ monetary policy for the past 10 years, is an acknowledgement that existing attempts at regulating money supply have not worked and that inflation is getting more pervasive, analysts told The Straits Times.

‘The real wake-up call is the persistence of inflation. The fact that it has spread from food prices to other parts of the economy has got the leadership very worried,’ said Beijing University finance professor Michael Pettis.

Alarm bells were set off when the country’s consumer price index (CPI) rose a decade-high 6.5 per cent in October, well above the government’s target of 3 per cent.

In recent days, food and fuel price hikes have pushed workers to go on strike in various cities across China.

The latest was a strike by taxi drivers yesterday in the north-eastern city of Harbin.

Previous bids to control the excess liquidity in the system have seen China’s central bank’s interest rates being hiked five times this year, bringing the benchmark rate on one-year loans to the current 7.29 per cent.

This year alone, it has raised banks’ reserve requirements nine times.

To further tighten money supply, analysts say Beijing is also likely to impose quarterly lending quotas on banks – instead of the usual annual quotas – and will enforce them more strictly.

 

Source: The Straits Times 6 Dec 07

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