China will shift to a “prudent” monetary policy next year as the government seeks to rein in liquidity, combat accelerating inflation and limit the risk of asset bubbles.
Officials “will adopt proactive fiscal policies and prudent monetary policies,” the state-run Xinhua News Agency said today after a meeting of the ruling Communist Party’s Politburo. The government had described the monetary stance as “moderately loose” since late 2008.
China is tightening after a record expansion of credit countered the effects of the financial crisis. The nation lags behind counterparts from Malaysia to South Korea in boosting borrowing costs after raising the benchmark interest rate for the first time since 2007 in October.
“Rate hikes are imminent — we expect one by the end of the month, with more to come in 2011,” Brian Jackson, a Hong Kong-based emerging-market strategist at Royal Bank of Canada, said after the Xinhua report.
The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, slipped 1.2 points, or less than 0.1 per cent, to 2,842.43 at the 3 pm close.
China’s next rate increase may come today or on December 10 and the yuan may strengthen at a “slightly” faster pace before year-end, said Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd who formerly worked for the International Monetary Fund and the European Central Bank.
Officials had been shifting policy ahead of today’s change in terminology. Besides raising rates, the central bank has ratcheted up banks’ reserve requirements this year, restricted loan growth, and ended the yuan’s temporary peg to the dollar.
Economists, including at Morgan Stanley, expect the government to trim the nation’s lending quota again next year.
The central bank last used the term “prudent” for monetary policy in 2007 before shifting to a tighter stance as overheating risks increased before the financial crisis.
China has a sound base for stable and fast growth next year even as difficulties and challenges remain, Xinhua reported, citing the Politburo. The nation will ensure food supplies and stabilise prices, Xinhua said.
Inflation pressures have been highlighted by companies including McDonald’s Corp, the world’s largest restaurant chain, pushing up prices. The one-year lending rate is at 5.56 per cent after October’s quarter-point increase, while the deposit rate is 2.5 per cent.
South Korea has raised rates twice this year, Malaysia three times and India six. Thailand’s unexpected increase this week was the nation’s third in 2010.
At Bank of America-Merrill Lynch, economist Lu Ting said that continuing a “proactive” fiscal stance while tightening monetary policy will allow the government to maintain economic growth of around 9 per cent. The nation’s expansion was 9.6 per cent in the third quarter from a year earlier.
