'Prudent' path for economic policies
Updated: 2011-12-10 08:03
By Li Xiang and George Ng (China Daily)
Experts expect easing process will be carried out gradually
BEIJING / HONG KONG - Chinese leaders pledged on Friday to maintain the country's prudent monetary policy, despite expectations that the easing of inflation would lead to a more growth-oriented stance.
The country will "ensure stable and relatively fast economic growth, while adjusting the economic structure and regulating inflationary expectations next year", the Political Bureau of the Communist Party of China Central Committee, the country's top decision-making body, announced on Friday.
Lu Zhengwei, chief economist with Industrial Bank, said the announcement indicates that any abrupt or aggressive move by the policymakers to loosen monetary tightening is unlikely.
"Unless the global economic situation worsens sharply, China's monetary easing process will be gradual."
Lu said that the government's statement could be interpreted as a prelude to more structural tax cuts to boost growth by reviving the country's private sector and the small businesses that have been burdened by heavy taxes.
But Simon Luk, director at Hong Kong-based Capital Focus Asset Management, said the government could be ready to further relax policies should the Chinese economy rapidly deteriorate and the global economy enter a recession in 2012.
"If the central government is to ease monetary policy, the best strategy is to loosen the curbs on bank credit, particularly restrictions on bank lending to developers and other corporations. Currently, economic activity is sluggish in the country due to curbs on bank lending," Luk said.
Friday's meeting came ahead of an annual central economic work conference, one of the nation's most important economic events, which will set economic policy guidelines for the coming year.
The rapid decline of inflation in November coupled with deteriorating exports and the weakening manufacturing sector are fanning concerns that China's economic momentum will slow more than expected. Economists forecast that China's growth will fall to 8.3 percent in 2012, with some even predicting the number could drop as low as 7.9 percent.
China's consumer price index, a main gauge of inflation, fell sharply in November to 4.2 percent year-on-year, the lowest level since September 2010, which analysts said will give the government greater leeway to carry out "selective easing" to counter the downside risk to growth.
Slower-than-expected growth momentum is likely to prompt the government to put more emphasis on stabilizing growth and preventing financial risks, analysts said.
"While authorities will be cautious about a premature or aggressive easing of policy, we expect them to be pre-emptive regarding downside risks and to be flexible and swift to roll out supportive policies," said Huang Yiping, an economist with Barclays Capital.
China has already started loosening its monetary policy to support growth as the central bank cut reserve requirements for banks last week.
"With external demand growth expected to remain soft through the first half of 2012, the challenge for policymakers is to enact measures that boost domestic demand and to loosen credit controls somewhat without stoking inflation and property price bubbles," Jing Ulrich, chairwoman of global markets for China at JP Morgan Chase & Co, said in a research note.
Analysts said another cut in the reserve ratio before the end of the year or in the first quarter of 2012 is likely.
But Zhuang Jian, senior economist at the Asian Development Bank, said that managing expectations of inflation should remain one of the key tasks of the government next year given rising labor costs at home, a potential surge in commodities prices and the possible soaring of imported inflation after the European Central Bank cut interest rates to revive the eurozone economy.
"In order to boost growth, the government should continue to invest in affordable housing projects, and increase spending on rural infrastructure and social welfare systems," he said. But Zhuang noted that it is very unlikely that the government will roll out a large stimulus package similar to the one in 2008 as the country is still absorbing the side effects of the massive spending program.
Andy Lam, research director at Harris Fraser Investment, said the term "prudent monetary policy" indicates that the central government will not be in a hurry to slash interest rates or the required reserve ratio in the near future.
"The government will monitor how the European debt crisis plays out and look at the inflation trend after the Lunar New Year before determining whether there is a need to ease monetary policy," he said.
"The timing could be around the second or third quarter for the central government to relax tightening measures."