China de­clares shift to ‘pru­dent’ mon­e­tary pol­icy

The Pak Banker - - Company& -

BEI­JING: China will switch to a pru­dent mon­e­tary pol­icy from a mod­er­ately loose stance, the Com­mu­nist Party's top lead­ers de­cided on Fri­day, a change that could pave the way for more in­ter­est rate in­creases and lend­ing con­trols, Reuters re­ported .

At the same time, the Polit­buro elected to main­tain China's proac­tive fis­cal pol­icy, an in­di­ca­tion that the govern­ment wants to con­tinue to ramp up in­vest­ment spend­ing even while tak­ing tight­en­ing steps to con­trol in­fla­tion.

Chi­nese and global mar­kets were lit­tle af­fected, with in­vestors tak­ing the view that the new word­ing was an af­fir­ma­tion of the grad­ual tight­en­ing that Bei­jing has al­ready started to im­ple­ment in re­cent months. But while the change in de­scrip­tion of pol­icy had been dis­cussed for sev­eral weeks by cen­tral bank ad­vis­ers, the Polit­buro's en­dorse­ment, re­ported by the of­fi­cial Xin­hua news agency, could still mark a de­ci­sive turn­ing point. "It means that all sort of mon­e­tary pol­icy tools to con­trol liq­uid­ity and to con­trol in­fla­tion can now be used," said Ken Peng, an econ­o­mist with Cit­i­group in Bei­jing.

"In the past we've been clearly fo­cus­ing on ad­min­is­tra­tive mea­sures. Go­ing for­ward we could be us­ing more price ad­just­ments via in­ter­est rates," he said, adding that he ex­pected five rate in­creases by the end of next year.

China has raised in­ter­est rates just once this year as it has guided its mon­e­tary pol­icy back to nor­mal from the ul­traloose set­tings it adopted to counter the global fi­nan­cial cri­sis. In­stead, it has used quan­ti­ta­tive tools to do the heavy work, of­fi­cially rais­ing banks' re­serve re­quire­ments five times. Along with play­ing a role in the fight against in­fla­tion, pol­icy tight­en­ing also sig­nals con­fi­dence that the world's sec­ond-largest econ­omy is on solid ground, even as the U.S. and Euro­pean re­cov­er­ies re­main frag­ile.

"China has no need now to worry about over­all de­mand at all," said Dong Xian'an, chief econ­o­mist with In­dus­trial Se­cu­ri­ties in Bei­jing. "In­stead, the top pri­or­ity is to curb in­fla­tion and avoid eco­nomic over­heat­ing." "The sooner China acts and the more force­ful mea­sures it takes, the bet­ter," he said. Con­sumer price in­fla­tion hit a 25-month high in Oc­to­ber of 4.4 per­cent and is ex­pected to have edged higher in Novem­ber. Al­though it has been driven al­most ex­clu­sively by food prices, pres­sures have been broad­en­ing on the back of higher global com­mod­ity costs. -PB News

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