Wednesday, December 5, 2007

Tighter monetary policy for China

The credit boom in China could be coming to an end. The Chinese authorities are threatening to reduce access to credit to try to calm inflation. Things are getting out of control; Chinese inflation is already at 6.5 percent and it is rising fast.

Dec. 5 (Bloomberg) -- China plans to shift to a "tight" monetary policy in 2008, signaling the government may raise interest rates further and allow quicker currency appreciation as the economy heads for its fastest expansion in 12 years.

The central bank changed its stance from the ``moderate tightening'' bias of recent months and ``prudent'' policy of the preceding decade, in a statement released today at the end of a three-day meeting of China's top leaders and financial officials.

The change underscores the government's failure to cool the world's fastest-growing major economy after five interest rate increases this year. China's economy grew 11.5 percent in the third quarter, inflation is running at a decade high and the benchmark stock index has more than doubled in 2007, as an export boom pumps cash into the financial system.

"China needs to take tougher monetary policy measures including continued rate increases to tame inflation, control fixed-asset investment expansion and damp asset prices,'' said Tao Dong, chief Asia economist at Credit Suisse Group in Hong Kong. "The central banks' rate increases this year have been outpaced by surging inflation."

The so-called Central Economic Work Conference is held annually before the end of the year to set policies and targets for next year. Before this week's conference, the Communist Party's ruling Politburo highlighted economic overheating and sustained inflation as key risks in the economy in 2008.

Consumer prices in China rose 6.5 percent in October from a year earlier and fixed-asset investment in urban areas increased 26.9 percent through October from a year ago, up from 24.5 percent in all of 2006.