PBOC: Too Soon to Loosen Grip on Economy

China can't loosen inflation control because the foundation of domestic price stability is not yet strong enough, the central bank said in a quarterly report on its website on November 16.

Inflationary pressure might arise from "extremely loose" global monetary conditions, still robust domestic economic expansion and rising labor costs as well as a potential increase in resource product prices, though the fall in prices could accelerate if economic growth declines further, the People's Bank of China (PBOC) said.

"We will continue the prudent monetary policy ... and fine-tune macroeconomic policies when it is appropriate in accordance with changes in the domestic and global economic situation."

The central bank said it will maintain reasonable credit growth and continue interest rate liberalization and yuan exchange rate reforms.

A survey the PBOC conducted in the third quarter found that inflation expectations for the fourth quarter have risen among Chinese households. Nearly 50 percent of the 20,000 households surveyed in 50 cities believed consumer prices will rise, even though the year-on-year growth of the consumer price index, a main gauge of inflation, has been declining since August.

However, analysts have predicted that the tight monetary policy will relax somewhat because the government vowed to fine-tune its economic policies to keep a balance between still hot inflation and sliding economic growth.

GDP growth in the world's second-largest economy slowed to 9.1 percent in the third quarter from 9.5 percent in the second and 9.7 percent in the first. And the official Purchasing Managers' Index, a key gauge of manufacturing activity, was weaker than expected in October, falling to 50.4 from 51.2 in September.

The central bank lowered yields on one-year bills on Tuesday again following last week's first decrease in almost two years, sparking concerns over a possible loosening of its monetary stance such as an interest rate cut.

The PBOC sold 52 billion yuan ($8.2 billion) in one-year central bills, a significant increase from 10 billion yuan last week.

In addition, new yuan lending grew by 586.8 billion yuan in October, a significant increase over the 470 billion yuan in September. And growth of M2, a broad measure of money supply that covers cash in circulation and all deposits, fell slightly to 12.9 percent in October from 13 percent in September.

Source: China Daily