Described as a weather vane, the annual national Central Economic Work Conference can always, in the highest measure, catch the public gaze. The 2007 economic work conference, convened in December, attached importance mainly to three issues: preventing fast economic growth from becoming overheated, preventing the structural price hikes from turning into the evident inflation, and tightening monetary policy to rein in economy. The authorities decided to change the 'prudent' monetary policy, enforced for nearly a decade since 1997, to a 'tighter' one, indicating a major change in financial policy for the year 2008.
It is estimated that 2008 will bear witness to China's economic and social progress, marking the 30th anniversary of its reform and opening up.
Thus, the tightened monetary policy might serve as an effective means to curb inflation, further develop China's economy and maintain sustainability.
China is enjoying its fifth straight year of double-digit economic growth, and therefore it is desirable to strengthen and improve its macro economic controls to prevent the relatively fast economic growth from overheating.
Fueled by the consecutive food price hikes, China's consumer price index (CPI) has jumped by nearly seven percent starting from last November, and has so far showed no signs of ceasing increase.
China has been fighting fast-rising prices for the past months, and trying to keep CPI, the highest level in 11 years, in check, which could be viewed as a bellwether of inflation.
Due to the CPI's continuous rise, the actual interest rate would be kept negative, which distorts the pricing scheme in the financial market, ruins the fair distribution of social wealth, and counters the anticipation of market players. All this could finally affect the soundness of national economy.
Even worse, bank loans were on a steep rise last year, with 3.58 trillion yuan in new loans granted
in the first eleven months, compared with 3.18 trillion yuan for all of 2006.
Despite the fact that the central bank raised the reserve requirement ratio 10 times and lifted interest rates 5 times in 2007, many commercial banks had already exceeded their anticipated loans target for the whole year in the first three quarters
High bank loans created high liquidity in the capital market, forcing up the prices of securities and property. The increase therefore triggered bank loans lent in a frenzy for real estate investment. A recent study conducted by the country's banking watchdog, China Banking Regulatory Commission, revealed that a considerable amount of bank loans were involved in fake or deceptive property deals.
It has been proved that excessive liquidity also plays a conspicuous role in the price hikes of consumer goods, pushing up CPI, and thus exerting pressure on the authorities to curb inflation expectation in 2008.
Inflation is a nightmare to a developing economy, and high liquidity of currency could consequently give rise to 'capital bubbles' and surplus productivity, and thus evolve into economic recession or crisis.
It has been manifested in the sub -prime loan crisis sweeping the United States that over-fast growing bank loans not only cause estate bubbles, but also pose risks to economy as a whole.
Taking into account the combination of all the above factors, the central government decided to launch a number of temporary interventionist measures to control prices, and implement a more aggressive monetary policy to curb inflation in 2008.
To maintain price levels, the central bank may try to bring the annual interest rate above zero, so it will have to increase the current interest rate by about 2 percentage points if the CPI growth remains at the current level. Interest rates could always act as a more efficient and most frequently used tool in interposing in financial market.
The tightened monetary policy could also bring about a major change to the property market. When the money supply from banks shrinks, there will be a weaker demand for property, a reduction in prices, a decrease in fixed asset investment, and hence less inflation pressure.
Nevertheless, it is expected that the central government will seek to tighten monetary policy primarily through market-oriented means, including more adjustments to banks' deposit reserve requirement ratio, open market operations, and central bank bills, instead of relying on administrative ones.
To achieve reasonable growth in money and credit, China will have to go through the trying time as quickly as possible. Be that as it may, the financial market is projected to remain stable in the year 2008.
By People's Daily Online
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