China switches to 'prudent' monetary policy

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The Independent Online

China's leadership today called for tighter control over bank lending and other spending next year, a shift in strategy as Beijing fights inflation and tries to guide rapid growth to a sustainable level.

The ruling Communist Party's top body, the Politburo, ordered the switch in monetary policy "from relatively loose to prudent", the government's Xinhua News Agency said.

The announcement reinforces a change in direction charted this year of modest tightening after the government and banks flooded the economy with easy money to effectively ward off the global economic crisis in 2009.

Beijing raised interest rates on October 19, highlighting its divergence from the US and other major economies, which are trying to boost growth. The central bank said in its latest quarterly report it would "gradually return policy to a normal position", indicating interest rates would rise.

The government is trying to cool inflation that spiked to 4.4% in October - driven by food costs jumping more than 10% - and well above the official 3% target. Analysts say November inflation might rise higher.

"Growth seems pretty solid and inflation is higher than expected," said Tom Orlik, an analyst in Beijing for Stone & McCarthy Research Associates. "Put that together and it makes sense to shift policy position."

Analysts expect more rate hikes in coming months. Chinese stocks have fallen amid investor concern that might slow growth or choke off credit that is helping to support stock prices.

The October 19 hike pushed the lending rate on a one-year loan to 5.56%. JP Morgan & Co said it expects three to four more increases beginning as early as this month and pushing the benchmark rate to 6.31% by mid-2011.

Chinese regulators have reined in credit by forcing banks to hold back more money as reserves and tighten lending standards.

Economic growth eased to 9.6% in the three months ending in September after hitting a post-crisis peak of 11.9% in the first quarter. The World Bank and private sector economists expect full-year growth of up to 10%.

Inflation has risen well above the 2.5% paid on Chinese bank deposits. That has triggered an outflow of cash into stocks and real estate as families seek a better return, fuelling fears of a dangerous price boom and bust.

Beijing is trying to rein in food prices by launching efforts to increase production of vegetables and other basic goods. Authorities are cracking down on hoarding and speculation they say are partly to blame for the price rises.

Analysts believe plans for more rate hikes face opposition from officials who worry about raising borrowing costs, especially for investment agencies run by local governments that owe hundreds of billions of dollars to state banks.

"You raise the cost of borrowing for those people and you could have them getting into trouble," Mr Orlik said. "So they are going to be pushing hard against any rapid changes in interest rates."