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October 17, 2009

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Zhou hints loose policy may go

CHINA'S central bank has given its first public indication that it is thinking about when to move away from the ultra-loose monetary policy it adopted a year ago to shield the economy from the global financial crisis.

Zhou Xiaochuan, governor of the People's Bank of China, said the central bank had suspended its normal criteria for judging the right degree of monetary restraint, but could not do so forever.

"An appropriately relaxed monetary policy was a measure to respond to the crisis," the China Securities Journal cited Zhou as saying.

"The central bank's measures in responding to the crisis are different from the guidance on inflationary expectations in normal times. There must be a handle on duration."

Speaking on Thursday evening to a university audience, Zhou did not say when the bank might start to reverse the easy policies.

"The central bank has rarely in the past adopted relaxed monetary policies, and if it weren't for the financial crisis, there would not be today's appropriately relaxed monetary policy," the paper quoted Zhou as saying at a forum that had been declared off the record to reporters.

No dramatic steps

But China is unlikely to take dramatic tightening steps anytime soon, analysts said.

"Monetary policy now is quite loose, but it is also quite moderate. In the short term, it is doubtful that regulators will judge that it is overly loose," said Xing Ziqiang, an economist with China International Capital Corp in Beijing.

The central bank will not raise interest rates before the United States Federal Reserve acts to do so, for fear of sucking in speculative capital, he said. Lifting banks' reserve requirements, an important quantitative control in China, is also difficult, because banks have only a thin margin of excess reserves at present.

This leaves more frequent central bank bill sales and stricter management of commercial bank lending as the main options for China if it is to rein in soaring liquidity.

"All the data agree that the economy has recovered. The panic is over. The emergency is over. So it's reasonable to expect a change in policy," said Stephen Green, an economist with Standard Chartered in Shanghai.

He said the central bank would likely rely on open-market operations to begin with.

Moral suasion will also be important and, to that end, the China Banking Regulatory Commission yesterday warned big banks to make sure their lending does not spiral out of control and that their capital adequacy ratios do not deteriorate.


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