PBOC Chief Says China Should Be on ‘High Alert’ on Inflation

China should be on “high alert” over inflation after February’s figures exceeded forecasts, central bank Governor Zhou Xiaochuan said, signaling a heightened focus on controlling prices.

Monetary policy is “no longer relaxed” and is “relatively neutral” as demonstrated by a 13 percent target for money-supply growth that’s tighter than expansion in the last two years, Zhou, head of the People’s Bank of China, said at a press conference today during the annual gathering of China’s National People’s Congress.

Zhou’s comments add to signs that officials are tightening policies even as the recovery in the world’s second-biggest economy shows signs of weakness. While the central bank has left interest rates and lenders’ reserve requirements unchanged since July last year, the government this month intensified a campaign to control home prices.

“The central bank has always attached great importance to consumer prices,” Zhou said. “Therefore we will use monetary policy and other measures to hopefully stabilize prices and inflation expectations.”

China’s new leaders including Li Keqiang, set to become premier this week, inherit the task of sustaining a recovery from the slowest growth in 13 years while reining in asset prices and credit. February inflation, distorted by the weeklong Lunar New Year holiday, accelerated to a 10-month-high of 3.2 percent.

Tighter Policy

“Zhou is indicating that monetary policy is being tightened to shift from loose to neutral,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong.

New lending in February and retail sales and industrial production in the first two months of 2013, all of which missed analyst estimates, fanned concerns that a rebound in the world’s second-largest economy may be moderating.

Hong Kong stocks extended losses after the remarks on inflation. The Hang Seng Index lost 1.5 percent for the day.

China this year will keep stable credit growth, which must be in line with goals for gross domestic product and consumer prices, Zhou said.

A 13 percent increase in money supply would be the smallest since 12.3 percent in 2000. M2, the broadest measure, expanded 13.8 percent in 2012 and 13.6 percent in 2011. Last year’s target was 14 percent.

Stable Prices

Commenting on this year’s goal, “compared with the real figures in the past two years, it is a bit tighter, indicating our emphasis on keeping prices basically stable,” Zhou said.

The remarks from Zhou “are clearly hawkish, and more so than expected,” said Dariusz Kowalczyk, senior economist and strategist with Credit Agricole CIB in Hong Kong. “The PBOC has shifted its focus to fighting inflation and seems to be quite concerned about price stability.”

Zhou, 65, the longest-serving PBOC governor, said he doesn’t know whether he will remain in the position and that any decision on the post has its procedures. He was named a vice chairman of the nation’s top government advisory body on March 11 amid speculation his tenure as central bank chief will be extended.

Asked if market-oriented changes to interest-rate and exchange-rate policies will continue, Zhou said such policies may be extended whether or not he stays governor. “Generally speaking, continuity and stability of the correct policies definitely should be maintained,” Zhou said. He said he made some mistakes, without elaborating.

Senior Adviser

Zhou was among 23 people elected as vice chairmen with the Chinese People’s Political Consultative Conference. The national legislature will decide March 16 on positions including PBOC governor.

The party plans to keep Zhou as head of the central bank, with the CPPCC vice chairman position allowing him to serve beyond retirement age, a person with direct knowledge of the discussions told Bloomberg News last month.

Retaining Zhou would provide stability at a time when the central bank is grappling with sustaining an economic recovery while reining in inflation and credit. Zhou was omitted from the Communist Party’s new 205-member Central Committee in November, fueling speculation that he would step down as he approached retirement age.

Asked about regional government loans, Zhou said that while a large portion of debt from China’s local government financing vehicles is safe and backed by projects, about 20 percent is risky.

Pay Attention

“This portion of LGFV loans is what we pay high attention to and they also are prone to risks,” he said, citing loans that aren’t backed by income-generating projects and must rely on other sources of revenue.

Dong Dasheng, a deputy director with the National Audit Office, said yesterday that local-government debt is at about the same level as the 10.7 trillion yuan given in a 2010 report published by his office. The total of all government debt, including central and local, ranges from 15 trillion yuan to 18 trillion yuan, Dong said.

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