BEIJING: China will switch to a prudent monetary policy from a moderately loose stance, the Communist Party's top leaders decided yesterday, a change that could pave the way for more interest rate increases and lending controls.
At the same time, the Politburo elected to maintain China's proactive fiscal policy, an indication that the government wants to continue to ramp up investment spending even while taking tightening steps to control inflation.
Chinese and global markets were little affected, with investors taking the view that the new wording was an affirmation of the gradual tightening that Beijing has already started to implement in recent months.
But while the change in description of policy had been discussed for several weeks by central bank advisers, the Politburo's endorsement, reported by the official Xinhua news agency, could still mark a decisive turning point.
It means that all sort of monetary policy tools to control liquidity and to control inflation can now be used, said Ken Peng, an economist with Citigroup in Beijing.
In the past, we've been clearly focusing on administrative measures. Going forward, we could be using more price adjustments via interest rates, he said, adding that he expected five rate increases by the end of next year.
China has raised interest rates just once this year as it has guided its monetary policy back to normal from the ultra-loose settings it adopted to counter the global financial crisis. Instead, it has used quantitative tools to do the heavy work, officially raising banks' reserve requirements five times.
Along with playing a role in the fight against inflation, policy tightening also signals confidence that the world's second-largest economy is on solid ground, even as the United States and European recoveries remain fragile. - Reuters
At the same time, the Politburo elected to maintain China's proactive fiscal policy, an indication that the government wants to continue to ramp up investment spending even while taking tightening steps to control inflation.
Chinese and global markets were little affected, with investors taking the view that the new wording was an affirmation of the gradual tightening that Beijing has already started to implement in recent months.
But while the change in description of policy had been discussed for several weeks by central bank advisers, the Politburo's endorsement, reported by the official Xinhua news agency, could still mark a decisive turning point.
It means that all sort of monetary policy tools to control liquidity and to control inflation can now be used, said Ken Peng, an economist with Citigroup in Beijing.
In the past, we've been clearly focusing on administrative measures. Going forward, we could be using more price adjustments via interest rates, he said, adding that he expected five rate increases by the end of next year.
China has raised interest rates just once this year as it has guided its monetary policy back to normal from the ultra-loose settings it adopted to counter the global financial crisis. Instead, it has used quantitative tools to do the heavy work, officially raising banks' reserve requirements five times.
Along with playing a role in the fight against inflation, policy tightening also signals confidence that the world's second-largest economy is on solid ground, even as the United States and European recoveries remain fragile. - Reuters
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