China Central Bank Chief Vows Prudent 2012 Monetary Policy

The People's Bank of China Governor Zhou Xiaochuan
The People's Bank of China governor Zhou Xiaochuan . Photographer: Andrew Harrer/Bloomberg

The People’s Bank of China will maintain a “prudent” monetary stance to ensure policy remains stable in 2012 and improve its management of foreign-exchange, Governor Zhou Xiaochuan said.

The central bank will “deepen financial reform, accelerate the development of financial markets, and strengthen and improve foreign-exchange management,” Zhou said in a New Year message on the PBOC’s website. Also today, Caixin magazine quoted Zhou as saying that while the yuan is near equilibrium, the currency’s trading band may widen to more than its current 0.5 percent on either side of the central bank rate.

Expansion of the world’s second-biggest economy is slowing as global growth falters and the government maintains curbs on the property market to cool speculation and price gains. The central bank may cut banks’ reserve requirements in January as a weeklong Chinese New Year holiday increases demand for cash and Premier Wen Jiabao tilts his focus toward sustaining growth.

“Accumulating evidence of weakness is building the case for policy easing,” Citigroup Inc. economists, including Ding Shuang, said in a report before today’s release, citing the slower pace of expansion in industrial production and fixed-asset investment. “We expect more policy easing in the months ahead, starting with another reserve ratio cut by the Chinese New Year.” The holiday starts Jan. 23.

Growth Slows

China’s gross domestic product expanded 9.1 percent from a year earlier in the third quarter, the least in two years. The pace may have fallen to 8.5 percent in the fourth quarter, Ding said in a Dec. 30 note.

Inflation slowed to 4.2 percent in November, still above the government’s target of 4 percent for the whole year. China’s consumer prices probably rose about 5 percent this year, exceeding the government’s target of 4 percent, and inflation controls have had some effect, Zhou said, according to Caixin.

“The economic growth momentum will be strong next year, as the inflation situation is improving,” Zhou said, according to Caixin. “The urgency of containing inflation isn’t as high as that in the beginning of 2011.”

Zhou said the central bank will maintain a reasonable scale of social financing and make efforts to optimize the credit structure. China’s current account surplus may be about 3 percent of gross domestic product in 2011, Caixin quoted Zhou as saying.

Trade Surplus

China’s merchandise trade surplus may still exceed $150 billion this year, Zhou said, according to Caixin. The country’s capital and current account balances have seen improvements though there has been “no reversal in fundamentals” and both remain in surplus, Zhou said, according to Caixin.

China reduced in November the amount of money banks must park with the PBOC, the first cut since 2008, freeing cash to support growth as Europe’s debt crisis capped exports and the property market cooled.

Manufacturing contracted for a second month in December, a purchasing managers’ index released by HSBC Holdings Plc showed. In November, China’s export growth was the weakest since 2009, excluding seasonal distortions.

Zhou also reiterated that China, the world’s biggest holder of foreign reserves, will work to strengthen and improve foreign-exchange management, improve financial services and management, and prevent systemic financial risks. He said China will push yuan reform in a gradual way, according to Caixin.

The yuan “is getting closer to its equilibrium level after several years of gradual adjustment”, Zhou said, according to Caixin. As the currency nears its target level, the cost of further policy adjustment strategies “may become much greater,” Caixin quoted him as saying.

The Chinese currency gained 4.7 percent against the dollar this year, its best performance since 2008. It advanced 0.40 percent to 6.2940 yesterday in Shanghai, breaking the 6.3 mark for the first since 1993, according to the China Foreign Exchange Trade System.

— With assistance by Daryl Loo, Lifei Zheng, and Nick Wadhams

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