China to Continue Prudent Monetary Policy: Central Bank

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Last updated at: (Beijing Time) Friday, February 21, 2003

China to Continue Prudent Monetary Policy: Central Bank

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China will continue to follow a prudent monetary policy, maintaining the stability of the renminbi and interest rates this year, but fine-tuning will be enhanced to absorb negative impacts from uncertainties hanging over the world economy, the central bank announced Thursday.

"The international financial situation for 2003 remains austere, and there is considerable uncertainty regarding global economic growth,'' the People's Bank of China (PBOC) said in its 2002 monetary policy report released Thursday.

Major concerns dogging the global financial outlook, it said, include the prospect of an imminent United States-led war on Iraq, terrorism, the slim possibility of a prompt US economic recovery as well as the looming threat of global deflation.

Such uncertainties have created new variables in the external environment of China's economic growth, and a continuing spike in global oil prices in the first half of this year, the PBOC said, may have a "certain impact'' on China's international balance of payment.

But reasons for optimism is also abound. Asian economies continue to fare relatively well, paving the way for closer economic co-operation in the region, it said, and the greater investment risks in many parts of the world will help China remain a leading recipient of foreign direct investment.

China surpassed the US for the first time last year to reap the world's largest FDI inflow of more than US$50 billion.

Domestically, a massive State asset management reform that was announced late last year and a stronger emphasis on developing non-State sectors promise to further expedite productivity, and increasingly active private investment will enhance the spontaneity in economic growth, therefore reducing the economy's reliance on government spending.

The central bank said a prudent monetary policy, which it adopted after 1997's Asian financial crisis, will continue this year to support economic growth, and a market-orientated interest rate reform will proceed "steadily'' to optimize the allocation of financial resources.

The current level of the renminbi's exchange rate, which some Western economists have complained is too low, as well as the mechanism through which it is determined, still fit China's national conditions, it said.

A robust international balance of payment and the rapid rises in foreign exchange reserves provide "a solid foundation to keep the yuan stable,'' the report said.

The loose global monetary environment in 2001 and last year, which witnessed widespread interest rate cuts, failed to lessen global deflationary pressure that has threatened to derail economic recovery, it noted. But China, which some Western economists accused of fuelling the global price downtrend, was not to blame.

China's real commodity exports, excluding processing trade, accounted for a tiny 2 per cent of global exports last year, which were "not enough to exert a determining influence on global prices,'' the report said.

The reasons for the global price decline, the PBOC said, span from technology-driven falls in manufacturing costs, a sluggish global economic recovery that failed to generate strong demand to the past few years' stock market bull run that absorbed too much capital.

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