"Soft landing" for Chinese economy? Tightening moves matter

10:18, November 28, 2010      

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Two years of monetary easing policies helped China's economy emerge from the global financial crisis. Now, facing a runaway inflow of hot money, fast loan growth, and escalating inflation, China could become serious about tightening regulations to achieve a "soft landing".

Analysts recently said China could see more interest rate hikes in the final month of 2010 in a bid to soak up excessive liquidity and prevent a potential overheating of the economy.

Further, the People's Bank of China (PBOC) Deputy Governor Hu Xiaolian said on Oct. 24 that using multiple monetary policy tools to improve liquidity management and guide the money and credit growth back to normal would be the main task for the central bank in the remainder of this year.

According to data released by the central bank Friday, in October those funds outstanding for foreign exchange (FOFE) hit 525.1 billion yuan (78.37 billion U.S. dollars), the second highest monthly record in history.

That is to say, PBOC issued 519 billion yuan of Renminbi in October to purchase the same amount of fresh inflow of foreign exchanges, which usually enter the nation in the form of trade surplus, foreign direct investment and short-term international speculative funds.

"The huge inflow of hot money is an important reason behind the sharp rise in FOFE," said Zhang Ming, a researcher with the China Academy of Social Sciences (CASS).

He noted, as the European debt crisis ceased, that speculative funds have returned to the emerging markets, notably after the U.S. Federal Reserve announced the second round of its quantitative easing policy.

"As the massive inflow of foreign exchange increases the domestic monetary base, it has become a major impetus of a broad money supply, which could exacerbate inflation," said Liu Yuhui, also a researcher with CASS.

Hefty foreign exchange inflow usually goes together with soaring inflation. China's FOFE hit a record 525.1 billion yuan in April 2008. In the same month, China's Consumer Price Index (CPI), a main gauge of inflation, was up by 8.5 percent, which was unprecedented.

Also, this October, the CPI rose by 4.4 percent, the highest amount in 25 months.

Boosted by a massive trade surplus, the domestic monetary situation began easing in late 2008, as China's broad money supply exceeded 70 trillion yuan, surpassing the United States to become the world's largest.

Li Daokui, a member of the monetary policy committee with the PBOC, said hefty money supplies posed huge risks to the nation' s banking system and, more imminently, would exacerbate the current inflation.

"The interest rate increase last month sent a signal that more such increases will come in the future," he said.

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