The , the nation's central bank, will maintain its cautious
stance on further changes to monetary policy to ensure that the
nation's fast-growing economy enjoys a soft landing, said the
bank's Vice Governor Guo Shuqing. He noted that macroeconomic
measures already taken have "had quite some effect," and further
action, such as an interest rate rise, "should be considered
prudently."
"We need some further observation," Guo said at a seminar
organized by the State Council's Development Research Center (DRC)
on Saturday. "But the central bank will remain especially vigilant
about price increases."
The remarks came as speculation is running high about a possible
rate increase.
The nation's consumer price index (CPI), the key barometer for
inflation, topped 5 percent last month. Central bankers had earlier
said that the bank would not turn a blind eye when the CPI reached
the 5 to 6 percent range.
The index emerged from negative territory only last year,
following months of deflationary pressure. But it has increased
rapidly in recent months, prompting concerns about inflation at a
time of sizzling investment and credit growth.
Fixed investment and loans have continued to soar since the
middle of last year, pushing up industrial prices and stretching
energy supplies and transportation capacity.
But this frenzied growth eased off significantly in June,
cheered by many as a sign that the state's tightening measures are
having an impact.
The government has used both monetary policy -- mainly three
increases in bank reserve requirements -- and administrative
measures such as price curbs and strict land policies to reduce
fixed investment and credit growth.
But the economy is still sending mixed signals about the
future.
"Monetary performance has seen obvious changes," Guo said,
citing the decline last month in money supply and new loan growth,
as well as stabilizing interest rates on the money market.
But liquidity remains high in the banking system, with
commercial banks' excess reserves, which they set aside for payment
needs, at 3.8 percent of their total deposits at the end of last
month, he said. That was higher than in September last year, when
the central bank announced the first of the three increases in
required reserves aimed at restricting banks' lending
capacities.
Guo said that excess bank reserves can only be higher today.
What is more important, he noted, is the possibility of fixed
investment and credit growth re-accelerating in new forms once
administrative controls are relaxed.
Yao Jingyuan, chief economist of the National Bureau of
Statistics (NBS), shared Guo's concern. "What is unique about
administrative measures is that they yield instant results, but the
results tend not to last long," he said.
Businesses may soon be requesting more loans from banks to fund
their expansion, using the excuse of alleviating a working capital
shortage, Guo added.
Analysts said the government-ordered slowdown in new loans in
June mainly came from fewer short-term working capital loans,
constraining liquidity at many small and medium-sized
enterprises.
Economists are still divided over the prospects for inflation in
the coming months and the necessity of an immediate rate
increase.
Zhang Zhuoyuan, a senior economist at the Chinese Academy of
Social Sciences, predicted full-year CPI growth would be in the 4
to 5 percent range, and a rate hike would be "hardly
avoidable."
"Prices are climbing, with the growth rate higher than the
one-year deposit rate. Price increases for raw material and
industrial goods have also surpassed the one-year lending rate," he
said. "That has clearly created a negative real interest rate
environment, which makes an interest rate rise inevitable."
Some seminar participants ruled out the possibility of rampant
inflation, insisting the current price level remains
manageable.
"Our basic judgment is that current inflationary pressures are
acceptable and controllable," said Zhang Junkuo, director of the
Market Economy Research Institute under the DRC.
China's CPI rose 3.6 percent in the first half of this year, but
the increases were 80 percent driven by rises in grain and food
prices, according to the NBS. That means the increase in core CPI
has been "insignificant," Zhang said.
Although CPI growth is likely to keep above 5 percent in the
third quarter, it is expected to subside significantly in the
fourth quarter owing to the high price base a year earlier and
anticipated increases in grain output.
"For the entire year, 4 percent should be achievable," Zhang
said.
(China Daily July 26, 2004)