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China Will Shift to ‘Prudent’ Monetary Policy in 2011

The People's Bank of China stands in Beijing
China will shift to a “prudent” monetary policy next year as the government seeks to rein in liquidity, combat accelerating inflation and limit the risk of asset bubbles. Photographer: Nelson Ching/Bloomberg

Dec. 3 (Bloomberg) -- China will shift to a “prudent” monetary policy next year as the government seeks to rein in liquidity, combat accelerating inflation and limit the risk of asset bubbles.

Officials “will adopt proactive fiscal policies and prudent monetary policies,” the state-run Xinhua News Agency said today after a meeting of the ruling Communist Party’s Politburo. The government had described the monetary stance as “moderately loose” since late 2008.

China is tightening after a record expansion of credit countered the effects of the financial crisis. The nation lags behind counterparts from Malaysia to South Korea in boosting borrowing costs after raising the benchmark interest rate for the first time since 2007 in October.

“Rate hikes are imminent -- we expect one by the end of the month, with more to come in 2011,” Brian Jackson, a Hong Kong-based emerging-market strategist at Royal Bank of Canada, said after the Xinhua report.

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, slipped 1.2 points, or less than 0.1 percent, to 2,842.43 at the 3 p.m. close.

Yuan’s Gains

China’s next rate increase may come today or on Dec. 10 and the yuan may strengthen at a “slightly” faster pace before year-end, said Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd. who formerly worked for the International Monetary Fund and the European Central Bank.

Officials had been shifting policy ahead of today’s change in terminology. Besides raising rates, the central bank has ratcheted up banks’ reserve requirements this year, restricted loan growth, and ended the yuan’s temporary peg to the dollar.

Economists, including at Morgan Stanley, expect the government to trim the nation’s lending quota again next year.

The central bank last used the term “prudent” for monetary policy in 2007 before shifting to a tighter stance as overheating risks increased before the financial crisis.

China has a sound base for stable and fast growth next year even as difficulties and challenges remain, Xinhua reported, citing the Politburo. The nation will ensure food supplies and stabilize prices, Xinhua said.

Inflation pressures have been highlighted by companies including McDonald’s Corp., the world’s largest restaurant chain, pushing up prices. The one-year lending rate is at 5.56 percent after October’s quarter-point increase, while the deposit rate is 2.5 percent.

Asian Central Banks

South Korea has raised rates twice this year, Malaysia three times and India six. Thailand’s unexpected increase this week was the nation’s third in 2010.

At Bank of America-Merrill Lynch, economist Lu Ting said that continuing a “proactive” fiscal stance while tightening monetary policy will allow the government to maintain economic growth of around 9 percent. The nation’s expansion was 9.6 percent in the third quarter from a year earlier.

October’s inflation rate of 4.4 percent was the highest in 25 months and the nation has had record property-price gains this year. Luxury-home costs in Beijing and Nanjing and so-called mass-market prices in Shanghai and Shenzhen have become “increasingly disconnected from fundamentals,” according to an International Monetary Fund study released today.

The announcement from the Politburo, the 25-member body that oversees the Communist Party and policy-making, came ahead of an annual economic work conference that will set guidelines for the coming year. That event may take place Dec. 10-12, Xinhua said.

Concern that monetary tightening will cut corporate profits and damp growth spurred a 6 percent sell-off in China’s benchmark stock index in the past month.

Today’s announcement of a “prudent” stance had been predicted by economists including at Deutsche Bank AG. and China International Capital Corp. Central bank officials and advisers had also used the term.

To contact Bloomberg News staff for this story: Li Yanping in Beijing at

To contact the editor responsible for this story: Chris Anstey at

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