03/12 China to Tighten Monetary Policy

Published: December 3, 2010
BEIJING — China will tighten its monetary policy next year, the country’s leaders said Friday, a sign that they are increasingly concerned about inflation and an overheated economy.

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Jason Lee/Reuters
A worker walks past apartments under construction in Beijing. The real estate market in China has been booming. Stimulus money and loose bank lending have spurred development.
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Dollar bills and the renminbi, China’s currency. Beijing has said it will gradually increase the flexibility of its exchange rate.
The move, announced in an article by Xinhua, China’s official news agency, comes as other nations, including the United States, continue to grapple with a global recession.

Xinhua reported that the Politburo, the elite team led by nine members at the top of the Communist Party hierarchy, had decided that China’s monetary policy should shift “from relatively loose to prudent next year.” The article also said China “will continue its proactive fiscal policy,” meaning that investment spending would not be severely curbed.

China’s economy has continued to grow rapidly, bolstered in part by an enormous government stimulus package and liberal lending by state banks after the global financial crisis began in late 2008. The move to rein in liquidity and bank lending, presumably through interest rate increases and other means, indicates that Chinese leaders feel confident enough in prospects for future growth that they can afford to cool down the economy.

The Xinhua article did not discuss the implications of a tighter monetary policy for the value of the renminbi. But one reason China has kept its monetary policy loose for the last several years has been to issue more renminbi and buy United States dollars.

That currency market intervention has kept the renminbi weak and has made Chinese exports more competitive in foreign markets while making foreign goods more expensive in China. The United States, Europe and some developing countries have become increasingly concerned; they say the relative weakness of the renminbi has caused the transfer of jobs and economic growth to China. And the Obama administration in particular has been putting pressure on China to let the renminbi appreciate.

Tightening the money supply might mean China’s central bank would buy fewer dollars and might strengthen the renminbi against the dollar and other major currencies — the effect critics of China’s monetary policy have been seeking. But analysts do not expect the shift in policy to lead to significant currency appreciation.

The government reported that the consumer price index, an indicator of inflation, rose 4.4 percent in October from the same month in 2009. The increase was the largest in 25 months and higher than the rate policy makers in Beijing are comfortable with. The government wants the average throughout all of 2010 to be no higher than 3 percent; in May, the index nudged up to 3.1 percent over May 2009 and has been gradually rising since.

Some analysts say the government will raise interest rates throughout 2011 to curb spending.

In October, the government slightly raised a benchmark lending rate, apparently to slow real estate speculation. The property market in China has been booming. Rising property prices, along with the government stimulus money and loose bank lending, have spurred new developments across the country, from the windswept plains of Inner Mongolia to the tropical southern island of Hainan. Some analysts say this has resulted in a dangerous bubble in the real estate market, while others argue that the capacity will be put to good use.

A record $560 billion of residential property was sold in 2009, an increase of 80 percent over 2008, according to government statistics.

Some officials in the central government have indicated they recognize there is a risk to loose bank lending and presumably want to slow it. Victor C. Shih, an associate professor at Northwestern University, has estimated that state banks have lent $1.6 trillion to companies owned by local governments, and that a significant portion of that is likely to pile up as bad loans, posing a risk to state banks.

Low wages have helped to hold down inflation. But those wages, coupled with the hot property market, mean that migrant workers from the interior of China are less tolerant of poor work conditions on the coasts, where many of China’s export manufacturing factories are located. Many workers are now choosing to stay closer to home in the interior provinces.

China Daily, an official English-language newspaper, reported on Monday that two large manufacturing hubs, the Pearl River Delta and the Yangtze River Delta, are experiencing severe worker shortages. The Pearl River Delta could be short by as many as 900,000 workers, the newspaper reported, citing a recent survey by the human resources department of Guangdong Province.

Keith Bradsher contributed reporting from Hong Kong.

A version of this article appeared in print on December 4, 2010, on page B3 of the New York edition.


About Uy Do

Banking System Analyst, former NTT data Global Marketing Dept Senior Analyst, Banking System Risk Specialist, HR Specialist
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