China to shift to prudent monetary policy next year

BEIJING, Dec. 3 (Xinhua) -- China said on Friday that it will switch its monetary policy stance from relatively loose to prudent next year to tackle rising inflation and keep economic growth at sustainable pace.

The Political Bureau of the Communist Party of China (CPC) Central Committee agreed in a meeting, chaired by President Hu Jintao, also general secretary of the CPC Central Committee, that the country would continue the proactive fiscal policy next year.

To accelerate the transformation of the economic development pattern should be the main focus of next year's work, and macro-regulation should be "more targeted, flexible and effective," according to a statement issued by the bureau.

In late 2008, China shifted its fiscal policy from "prudent" to a "proactive" stance and eased monetary policy from "tight" to "moderately loose," to counter the global financial crisis.

That came with a 4-trillion yuan stimulus package which largely fund infrastructure construction and improving people's livelihood.

China's decision to implement a moderately loose monetary policy over the past two years was a "special move" to counter the global financial crisis, which should be ended now as the domestic economy's growth has stabilized, said Prof. Zhang Liqing with the Central University of Finance and Economics.

Xia Bin, director of the finance research institute under the State Council's Development Research Center, said shifting to a prudent monetary policy will help promote China's sustainable growth. It is time for change with the domestic economy maintaining its strong momentum and with inflation running at a high level as liquidity from abroad grows.

China's economy grew 9.6 percent year on year in the third quarter this year, slowing from its 10.3-percent increase in the second quarter and 11.9 percent in the first quarter.

The momentum of growth continued to strengthen, as manufacturing activities saw the 21st straight monthly expansion in November.

However, consumer inflation hit a 25-month high of 4.4 percent in October, exceeding the government's target of 3 percent for this year, pushed up by soaring food prices.

New loans in the first ten months of the year totaled 6.9 trillion yuan, slightly less than the government's full-year target of 7.5 trillion yuan. Many financial institutions have estimated November new loans are likely to have exceeded 500 billion yuan.

Broad money supply has exceeded 70 trillion yuan, surpassing the United States to become the world's largest, causing more concern and as the U.S. Federal Reserve moves toward a second round of quantitative easing.

Gao Peiyong, head of the Institute of Finance and Trade Economics under the Chinese Academy of Social Sciences, said China's macro-economic regulations has two goals: maintaining economic growth and curbing the rise in inflation. Maintaining economic growth requires a policy of fiscal expansion while fighting inflation requires tighter monetary policy. The current economic situation demands a combination of the two.

To check money expansion, the People's Bank of China, the central bank, hiked the benchmark interest rates in October and raised the reserve requirement ratio for banks twice in a month, indicating the government's concern about rising inflation.

The government has announced harsh measures, including price controls when necessary, and has cracked down on hoarding and speculation to prevent runaway price hikes.

It has also increased the supply of vegetables, meat and other food necessities.

The Political Bureau statement said more efforts would be made to ensure market supplies, stabilize prices and regulate market order next year.

It noted the nation has faced complicated social and economic conditions since early this year. Thanks to the stimulus package and efforts to speed-up economic restructuring, China has maintained relatively fast economic growth, it noted.

"The momentum of economic and social development has been consolidated," it said.

"The conditions in China provide a sound base for stable and fast growth next year, but the country will face many difficulties and challenges," it noted.

In next year's economic work, the government will further improve policies to boost domestic demand, especially consumption, and promote imports.

The meeting called for heightened awareness of risks, as well as more efforts to consolidate success in the fight against the financial crisis, keep steady and relatively fast economic growth and promote social harmony and stability.

It also vowed to continue efforts to promote energy saving and emission cutting and enhance international cooperation to tackle climate change.

Days before the Political Bureau meeting, President Hu chaired a meeting to solicit opinions on economic work from non-CPC party personages. Premier Wen Jiabao, top political advisor Jia Qinglin, Vice President Xi Jinping and Vice Premier Li Keqiang attended the meeting Tuesday.

"Next year marks the start of China's 12th Five-year Program (2011-2015). It is of great importance to better deal with the economic work," Hu said at the meeting.

The long-anticipated tightening move drove China's benchmark Shanghai Composite Index down 0.04 percent, or 1.18 points, Friday to 2,842.43.

Amid fears authorities will raise interest rates before the end of the year, China's benchmark stock index fell 5.3 percent in November.

Although tightening is necessary to prevent overheating, experts said the government should properly handle the policy to prevent growth slowing too much.

Yuan Gangming, an economics researcher at Tsinghua University, said shifting to the prudent monetary policy does not mean fully-fledged tightening. China should properly handle the force of its monetary policy and avoid over-tightening, which would weigh on economic growth, he said.