China’s central bank pledged to strengthen liquidity management and “normalize” monetary conditions after having twice this month ordered banks to hold more in reserves to curb inflation that’s at a two-year high.
The nation will use quantitative and price tools to manage liquidity, Hu Xiaolian, a deputy governor of the People’s Bank of China, said in a statement posted to the central bank’s website today. China will also control the pace of bank lending for the remainder of this year as it will be difficult to stay within the government’s 7.5 trillion yuan ($1.13 billion) target for new loans in 2010, she said.
Premier Wen Jiabao’s government has raised interest rates, increased the reserve requirement for banks and pledged to use price controls at part of efforts to rein in inflation that surged last month to 4.4 percent. Analysts at nine banks surveyed by Bloomberg News last week said they expected China to raise interest rates a second time this year.
“Beijing’s top concern is excess liquidity flooding the economy and fueling asset price inflation, so the policy stance is moving from accommodative to prudent, actually, more tightening,” Jinny Yan, an economist at Standard Chartered Plc in Shanghai, said before today’s central bank statement.
Inflation this year may also exceed the government’s 3 percent target for 2010, Zhang Ping, head of China’s top economic planning agency, said earlier this month. The more- than-estimate 4.4 percent increase in consumer prices in October was driven by a 10 percent surge in food costs, according to government statistics.
Inflation Target
China may set a higher inflation target of 4 percent for next year and tighten its monetary policy stance at the government’s annual economic work meeting to be held at the end of this year, the China Business News newspaper reported today, citing an unidentified person who has consulted on policy.
Rising wages, higher commodities prices and abundant liquidity are adding to inflation expectations, the central bank’s Hu said. Inflation pressure in China is also rising as the country attracts capital inflows because of increasing expectations for yuan appreciation, she said.
“The key task of monetary policy currently is to strengthen liquidity management, which is also a main way of normalizing monetary conditions,” Hu said.
Inflation Forecasts
Higher prices for food and services are prompting economists to raise their forecasts for inflation next year. Standard Chartered lifted its estimate last week to 5.5 percent from 4 percent, and UBS AG said Nov. 19 consumer prices will rise as much as 4.5 percent, compared with its previous range of 3.5 percent to 4 percent. Bank of America-Merrill Lynch revised its estimate to 4.5 percent from 3.6 percent.
The People’s Bank of China raised benchmark lending and deposit rates last month for the first time since 2007, two days before the government released statistics showing inflation accelerated in September to the fastest pace in 23 months.
A day before the release of October inflation data, the central bank raised the reserve requirement ratio for the nation’s lenders by 50 basis points and increased the reserve requirement once more last week by an additional 50 basis points. November’s inflation figure is due to be released on Dec. 13.
The U.S. Federal Reserve’s plan to buy $600 billion of Treasuries to pump money into the world’s biggest economy has also added to China’s inflation concerns. Chinese Central Banker Zhou Xiaochuan said last week that loose policies in developed economies may spark inflows of cash to China fueling concern about asset-price bubbles.
The central bank’s Hu said in today’s statement that the global economic environment remains “complex” and faces challenges from quantitative easing by developed nations.(Source: Bloomberg)
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