China announces shift to prudent monetary policy

By @ibtimes on

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, the state Xinhua news agency reported on Friday.

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 at the same time as taking tightening steps to control inflation.

The change in description of monetary policy had been discussed for several weeks by advisers to the central bank, but the Politburo's endorsement marks a decisive turning point in Chinese policy.

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 ultra-loose settings it adopted to counter the global financial crisis.

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, rising 4.4 percent from a year earlier, and is expected to have edged higher in November. Although it has been driven almost exclusively by food prices, price pressures have been broadening on the back of higher global commodity costs.

(Reporting by Zhou Xin, Simon Rabinovitch and Langi Chiang; Editing by Don Durfee and Chris Lewis)

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