PBOC to tighten cash liquidity amid fears of inflation
Print Edition
China signaled concern yesterday that ample credit could fuel inflation as a report showed house prices jumped the most in nearly three years, with double-digit gains in major cities.
A policy adviser to the People’s Bank of China said the authority may tighten cash conditions in the financial system to address the inflation risks, while the central bank refrained from supplying cash to money markets for the second day running.
If it also avoids injecting cash at its next money market operation tomorrow, the effect will be a net weekly drain of 58 billion yuan — the second biggest since February.
“(Policy) will only be tightened slightly as inflation is rising. There are some concerns on bank lending,” said Song Guoqing, an academic member of the central bank’s monetary policy committee.
“Policy fine-tuning will rely mainly on open market operations and I cannot see any possibility of changing interest rates or bank reserve ratios.”
Song’s comments and the sharp rise in house prices highlight China’s policy quandary.
On the one hand, policy-makers want to avoid a buildup of market and economic imbalances, such as a debt-fueled property bubble. On the other hand, they are reluctant to use more potent instruments to control the imbalances in case they also blunt a modest economic recovery ahead of a crucial policy meeting next month.
China’s house prices in September rose 9.1 percent from a year earlier, the sharpest rise since January 2011, calculations of official data by Reuters show.
Song said consumer inflation rather than property prices served as the central bank’s key policy signpost.
Consumer price inflation rose to a seven-month high of 3.1 percent in September from 2.6 percent in August, data showed last week.
China tries to gear the country more to consumer-led growth.
The adviser predicted policy fine-tuning would be sufficient to stabilize inflation at the current level in the fourth quarter and to keep the full-year rate comfortably below the government target of 3.5 percent.
Economic growth could ease to 7.5 percent in the fourth quarter from 7.8 percent in the third quarter, he said. But full-year growth could still come in at 7.6 percent, just above China’s 7.5 percent target, he added.
“A slowdown in growth in the fourth quarter would probably reawaken fears of a hard landing but we would welcome it,” wrote Mark Williams and Julian Evans-Pritchard of Capital Economics in a research note. “A prolonged surge in credit-fuelled investment is the last thing China now needs.”
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