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Central bank to ensure 'soft landing'
By Zhang Dingmin (China Daily)
Updated: 2004-07-26 08:29
China's central bank will maintain its cautious stance on further monetary
policy moves to ensure that the nation's fast-growing economy enjoys a "soft
landing," a leading official said.
People's Bank of China Vice-Governor Guo Shuqing said that macroeconomic
measures already taken have "had quite some effect," meaning that further
action, such as an interest rate rise, "should be considered prudently."
"We need some further observation," Guo told a seminar organized by the State
Council's Development Research Centre (DRC) on Saturday.
"But the central bank will remain especially vigilant about price increases,"
pledged Guo, whose remarks came as speculation ran high about a possible rate
increase.
This comes as the nation's consumer price index (CPI), the key barometer for
inflation, topped 5 per cent last month.
Central bankers had earlier said that the bank would not turn a blind eye
when the CPI reached the 5-6 per cent range.
The index emerged from negative territory only last year, following months of
deflationary pressure. But it increased rapidly in recent months, prompting
inflationary concerns at a time of sizzling investment and credit growth.
China's fixed investment and loans kept soaring since the middle of last
year, pushing up industrial prices and stretching supplies of energy and
transportation capacity.
But this frenzied growth eased off significantly in June, something which was
cheered by many as a sign that the State's tightening measures are having an
impact.
The government has taken both monetary policy moves, 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 only mixed signals about the future
direction of macroeconomic policy.
"Monetary performance has seen obvious changes," Guo said, citing the fall
last month in money supply and new loans growth, as well as stabilizing interest
rates on the money market.
But liquidity remains loose in the banking system, with commercial banks'
excess reserves, which they set aside for payment needs, standing at 3.75 per
cent of their total deposits at the end of last month, he said. That was higher
than the level in September last year, when the central bank announced the first
of the three increases in required reserves aimed at restricting banks' lending
capacities.
"It (excess bank reserve levels) can only be higher today," Guo said.
What is more important, the official noted, is the possibility of fixed
investment and credit growth re-accelerating "in new forms" once administrative
controls are relaxed.
Guo's concern was shared by Yao Jingyuan, chief economist of the National
Bureau of Statistics (NBS). "What is unique about administrative measures is
that they yield instant results, but the results tend not to last long," he told
the seminar.
And businesses may soon be requesting more loans from banks to fund their
expansion, using the excuse of alleviating a working capital shortage, Guo said.
Analysts said the government-ordered slowdown in new loans in June was mainly
due to 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 4-5 per cent range, and a rate
rise 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 by 3.6 per cent in the first half of this year, but the
increases were 80 per cent driven by rises in grain and food prices, the NBS
said. That means the increase in core CPI has been "insignificant," Zhang said.
Although CPI growth is likely to keep above 5 per cent for the third quarter,
it is expected to subside significantly in the fourth quarter due to the high
price base a year earlier and anticipated increases in grain output.
"For the entire year, 4 per cent should be achievable," Zhang said.
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