China reaffirms moderately loose monetary policy

The People's Bank of China, the central bank, reiterated on Wednesday that it will maintain a moderately loose monetary policy in 2010 and improve the focus and flexibility of the policy according to new circumstances.

The monetary policy in 2010 would aim to maintain a stable and relatively rapid rate of economic growth, improve the economic structure and manage inflation expectations, the central bank said in a statement on its website after the conclusion of its annual work conference from Jan 5 to 6.

"We must continue our efforts to sustain a stable and relatively fast rate of economic growth and stabilize prices and effectively manage inflation expectations," the central bank said.

"It is still too early to change the present monetary policy as the recovery is still not solid enough," said Li Yang, deputy director of the Chinese Academy of Social Sciences.

"A too-early exit would mean losing what we have achieved," he added.

Moderate credit growth

China began to implement a moderately loose monetary policy at the end of 2008 to fight the fallout of the global financial crisis. New yuan-denominated loans exceeded 9.2 trillion yuan ($1.35 trillion) in the first 11 months of 2009, five trillion more than the same period of the previous year.

With strong credit support, China's economy has continued to gain momentum, staging an 8.9 percent growth in the third quarter last year which pushed economic growth to the 8 percent annual target.

The central bank emphasized a balanced structure and supply of good quality credit in 2010, according to the statement.

Bank loans would be guided to finance the real economy and support the "most important and key sectors", the statement said.

The central bank encouraged financial institutions to strengthen support to rural development, employment, consumption and strategic new industries.

Loans would be strictly restrained from going to sectors with overcapacity and high-energy-consuming and high-emission industries and new projects, the statement said.

A relatively stable credit growth is expected in 2010 under the management of the regulatory authorities, said Qiu Gaoqing, analyst with the Bank of Communications.

He expected new loans would fall to seven to 8 trillion yuan in 2010 and fluidity surpluses would continue for the entire year.

Guo Tianyong, professor with the Central University of Finance and Economics, said that credit policy would focus more on improving the economic structure.

Commitment to stable yuan

The central bank reassured its commitment to keeping the yuan stable, saying it would keep the renminbi exchange rate "basically stable" at a "reasonable and balanced level".

"China will further improve the yuan exchange rate mechanism, acting on its own initiative and in a controllable and gradual manner," it said.

Zhang Xiaoqiang, vice minister in charge of the National Development and Reform Commission, said in a speech released Tuesday that China's currency was facing renewed pressure to appreciate owing to monetary policies in developed countries, a weakening dollar and China's economic recovery.

A stronger yuan would likely spur massive inflow of speculative money, making liquidity management more difficult, he said.

However, the Chinese government has been firm in its stance about a stable yuan. Premier Wen told Xinhua in December that China would not yield to foreign pressure for the appreciation of the yuan in any form.

"A stable Chinese currency is good for the international community," Wen said.

Property risks

The central bank would keep a close watch on the real estate market and "strictly" implement the credit policy for the real estate sector to ensure a healthy development of China's housing finance, according to the statement online.

The record lending and favorable purchase policies in 2009 had lifted property prices in China. In November, home prices in 70 major cities rose 5.7 percent from a year earlier, accelerating from October's 3.9 percent.

Premier Wen pledged in December that the government would use taxes and interest rates on loans to stabilize property prices as prices had risen too quickly in some areas.

The government started to reimpose a sales tax on homes sold within five years of their purchase from Jan 1 this year, after cutting the period to two years in January 2009 to boost the property market.

In addition, the central bank vowed to deepen reform of financial enterprises in 2010. "The mechanism for maintaining financial security will be improved and innovation of financial products will be accelerated," said the statement.