China ‘set to tighten monetary policy’

by editor | 3rd December 2010 10:11 am

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China may be ready to raise interest rates to tackle inflation 

 Yuan notes - file pic

China is to tighten its monetary policy next year, the Communist Party’s top body has said, in a sign that interest rate rises may be on the way. The country has recently tightened lending rules by telling banks to keep more cash in reserve,
Now the Communist Party’s Politburo has said China will shift its monetary policy from “relatively loose” to “prudent”, the Xinhua news agency said. Annualised consumer price inflation hit a 25-month high in October, at 4.4%.
That is well above the government’s full-year target of 3%. Food prices have been mostly responsible for the rise, but there have been further price pressures on the back of higher global commodity costs.

‘Price adjustments’
The change of monetary policy had been on the cards for a number of weeks before the Politburo announcement.
“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.
“Going forward we could be using more price adjustments via interest rates,” he said.
The bank funding squeeze that came into effect on Monday has meant that less cash may now find its way into the stock market.
China’s key stock index closed flat on Friday, dropping 1% on the week.
Property pressures
Also on Friday, an IMF paper said China and Hong Kong would need to implement more measures to rein in property bubbles forming in parts of their markets.
“The mass-market segment in a few large cities such as Shanghai and Shenzhen, and the luxury segment in Beijing and Nanjing appear to be increasingly disconnected from fundamentals,” the IMF said.
It added: “A senior official at China’s central bank last week warned that inflationary pressures were building because of flows of capital into the country and expectations of a revaluation of the yuan.”
And another report says gold imports into China have soared this year as investors seek to safeguard their cash amid rising inflation.
The country imported 209.7 tonnes of gold in the first 10 months of the year, the China Business News said, citing Shen Xiangrong, chairman of the Shanghai Gold Exchange.
That is an increase of 480% from the same period last year.

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