Inflationary pressure may climb as China central bank urges flexibility in policies

11:02, June 19, 2010      

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China's central bank said Friday more flexibility would be allowed to guide money policies based upon changing circumstances if inflationary pressures increase during the economic recovery along with rising market confidence.

The risk of higher prices may grow stronger given that liquidity remains loose throughout the world and China has experienced much faster credit growth earlier, according to the Annual Report 2009 issued Friday by the central bank, the People's Bank of China (PBOC).

China's financial institutions lent a record 9.6 trillion yuan (1.4 trillion U.S. dollars) in new yuan-denominated loans last year, almost double that of the previous year, to spur the economy during the ongoing global downturn, but it was accompanied by soaring property prices and rising expectations of possible inflation.

China has targeted a total of 7.5 trillion yuan in new loans for 2010.

But prices were still very likely to remain stable as China's grain harvest has been substantial for a number of years, and manufacturers of consumer goods have been seeing rising productivity, which ensured supply, the central bank said.

China's Consumer Price Index, a main gauge of inflation, rose 3.1 percent in May, exceeding the government target to keep the nation's inflation rate under 3 percent for 2010.

National Bureau of Statistics spokesman Sheng Laiyun earlier said the higher inflation in May was due to a low comparison basis from the same period last year, and inflationary pressure was easing given that China had the basics for keeping prices under control.

However, the nation needed to safeguard the supply of sufficient agricultural products and curb soaring housing prices in some cities to manage inflationary expectations, according to the report.

Relatively relaxed monetary policy to remain

The central bank report said China would maintain its moderately relaxed monetary policy in 2010, projecting for this year a 17 percent increase in broad money supply (M2), which covers cash in circulation and all deposits.

Central bank vice governor Su Ning earlier said a 17 percent year on year increase in China's broad money supply, and a targeted 7.5 trillion yuan in new loans for this year, indicated a relatively relaxed monetary policy.

Additionally, China's M2 had increased 21 percent year on year to 66.34 trillion yuan by the end of May, according to PBOC data.

The central bank said in the report it would work to control the pace of credit growth, maintain the balance of credit, and avoid apparent fluctuations.

The central bank also said a differentiated credit policy should be carried out to optimize the nation's credit structure.

Specifically, more credit support should be made available for agriculture and small and medium-sized companies, which traditionally face difficulties in obtaining financing.

Favorable credit policies should also be implemented to support underdeveloped sectors, employment, strategically important industries such as new energies, new materials, and energy savings, while strict credit controls should be imposed upon energy-consuming and polluting

industries and those with overcapacities, according to the report.

Steady Progress of RMB Exchange Rate Reform

The PBOC said China was to steadily continue market reforms of exchange rates and improve the RMB (Chinese currency) exchange rate formation mechanism.

Further, principles of independent decision-making, controllability and graduality should be enacted in improving the mechanism, according to the report.

The central bank would also work to make trade and investment more

convenient by promoting the yuan settlement in cross-border trade.

China previously signed a number of bilateral currency swap agreements with countries such as the Republic of Korea, Malaysia, Belarus, and Indonesia.

Source: Xinhua

(Editor:张茜)

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