China Needs Tighter Monetary Policy, State Research Agency Says

China needs to lean toward a tighter monetary-policy stance as the economy faces risks from excessive liquidity and credit, according to a research unit of the nation’s top economic-planning agency.

Authorities should drain more cash from the financial system to manage liquidity and regulators need to enhance oversight of banks’ off-balance-sheet business, the State Information Center, a research arm of the National Development and Reform Commission, said in a report published today in the official China Securities Journal.

The report adds to signs that the central bank and other agencies will step up efforts to counter risks from rising property prices and debt as the economy recovers from the weakest growth in 13 years. The People’s Bank of China withdrew a net 910 billion yuan ($146 billion) from the financial system last week, more than double the previous record in data compiled by Bloomberg going back to 2008.

“For now, risks of overheating are bigger than those of a deep slowdown,” said Sun Mingchun, head of China research at Daiwa Capital Markets in Hong Kong.

Growth in gross domestic product will accelerate further to 8 percent in the first quarter from 7.9 percent in the final three months of 2012 thanks to strong expansion in infrastructure investment, with consumer inflation at 2.6 percent for the first quarter of 2013, according to the research agency’s report.

The yen’s depreciation will drag down China’s export growth rate in the first quarter by 2 percentage points to 8 percent, according to the report by a group led by Fan Jianping, director of the State Information Center’s economic-forecast department. The Japanese currency has fallen 9 percent against the dollar since the Dec. 16 election victory of Prime Minister Shinzo Abe’s Liberal Democratic Party.

“The U.S. economy is in better shape than Europe and Japan,” according to the report. That indicates a “great amount of funds may flow back to the U.S.,” meaning the dollar may appreciate.

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