China says more prudent monetary policy will be needed next year

BEIJING - China pledged on Friday to tighten its monetary policy next year, shifting from its "moderately loose" stance to a more prudent one as the central government steps up efforts to tame rising inflation and head off asset bubbles.

The Political Bureau of the Communist Party of China (CPC) Central Committee announced that the country will implement an active fiscal policy and a prudent monetary policy next year and increase the flexibility and effectiveness of macroeconomic adjustments.

The announcement came a few days ahead of the CPC Central Committee Economic Working Conference, which sets the tone for next year's economic policies.

Analysts said it is a sign that tightening monetary policies - such as interest rate hikes - may be imminent as Beijing enters a new phase in its effort to contain inflation and curb spiraling domestic prices.

"We expect more rate hikes to be rolled out soon," said Dong Xian'an, chief economist at Industrial Securities. "We think that the faster the government moves to raise the rate, the better it is for the economy."

The central bank hiked the benchmark interest rate by 25 basis points in October for the first time in nearly three years. It also twice told banks to set aside more deposits as reserves in order to limit their capacity to lend.

Dong said that the policymakers in Beijing should raise the interest rate by more than 50 basis points in order to effectively rein in extra liquidity and limit the risk of asset bubbles.

"China's top priority is to manage inflation expectation, although more rate hikes may raise concerns about potential inflows of hot money," he said.

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The country's consumer price index rose 4.4 percent year-on-year in October - well above the government's full-year target of 3 percent - with the price of 18 varieties of vegetable rising more than 60 percent.

"We expect the next rate increase to come around the time when the government releases the November data, which is due on Dec 13," Wang Tao, a Beijing-based economist for UBS AG, said in a report.

Analysts said that China's tightened monetary policy could also imply a new lending target of 6.5 trillion yuan ($975 billion) next year, down by 15 percent from this year's total.

In the meantime, the shift could be seen as a signal of the government's confidence that the country's economy is on solid ground, analysts said.

China's grain harvest this year rose for the seventh year in a row with total output reaching a record 546.41 million tons. The harvest was up 2.9 percent from last year, the National Bureau of Statistics said on Friday.

And the country's factories were also producing more. Output strengthened in November, with the official purchasing managers index rising to 55.2. It was the largest rise in seven months.

The benchmark Shanghai Composite Index ended slightly lower on Friday, closing at 2842.43 points amid investor concern that more tightening measures might slow growth and restrain liquidity, which is helping to support stock prices.