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China to turn to slightly tighter policy

CHINA is likely to shift to a moderate-tightening monetary policy in the fourth quarter this year as it tries to curb asset price bubbles now that the economy is seen to grow more solidly, economists said.

The country's economic data have sparked optimism in a still-gloomy global environment as they showed that China is recovering across all sectors except exports.

"The first half data were better than expected. The policies are expected to remain until the third quarter," said Liao Qun, CITIC Ka Wah Bank's chief economist.

China's economy expanded by 7.9 percent in the second quarter, boosting the first half growth to 7.1 percent. Fixed-asset investment continues to surge, manufacturing has been gathering steam and retail sales have also been buoyant.

But Sherman Chan, a Moody's economist, said the continuation of the strong economic momentum is far from guaranteed as the global environment is still subdued and is expected to remain a drag on exports.

"Therefore, despite achieving an early success in revitalizing growth, policy makers still need to remain on alert for some time yet," Chan said.

However, Liao believed that the government will shift to a tightening policy in the fourth quarter due to a liquidity overflow in China. He said possible tightening measures include a rise in interest rates and reserve requirements.

New yuan lending has already touched 7.37 trillion yuan (US$1.1 trillion) in the first six months, exceeding the target of 5 trillion yuan for the whole year set at the start of this year. The new yuan loans could easily surpass 10 trillion yuan for this year.

The stock and real estate markets are seen as beneficiaries from the surge in yuan loans.

The Shanghai Composite Index jumped 80 percent so far this year to rank as the world's best performing market. But the rebound of real estate prices in major cities has also triggered concerns of a new round of over-heating.

Royal Bank of Scotland said in a note that the banking industry widely expects tightening measures in the fourth quarter.


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