In recent years, "excess liquidity" has been among the most popular economic terms. It usually referred to an economic situation in which there was an ample supply of capital and banks had a strong impulse to lend.

Affected by imbalance in the world economy, China has been bothered by mounting trade surplus that resulted in huge foreign exchange reserves and the banking system's credit initiative.

China's Foreign Trade Situation Report predicted that the nation's annual trade surplus would reach $250 billion this year. Tightening monetary policies such as credit squeezes might temporarily ease the problem, but the key lies in obtaining a balance between foreign earnings and payments.

This requires a reasonable growth of the Chinese currency, the yuan. Meanwhile, it also calls for the expansion of domestic demand and maturity of the financial system. 

Yuan appreciation

China's currency, the yuan, hit a new high against the US dollar on December 13, breaking the 7.36 mark. The central parity rate stood at 7.3568 yuan against one dollar.

The yuan has appreciated about 11 percent since China de-pegged it from the US dollar in July 2005.

Some critics said that the yuan was undervalued, something which gave China exporters an unfair price advantage. It was also a main reason for the massive trade imbalance between China and its major trading partners.

At the fourth China-EU Business Summit held recently, Premier Wen Jiabao said China would continue to follow an independent, controllable, and gradual approach in improving the exchange rate mechanism.

He said China would give better play to the basic role of market supply and demand while reforming its exchange rate system to strengthen the yuan's flexibility and gradually make it convertible under the capital account.

Interest rates

The People's Bank of China, the central bank, raised the benchmark deposit and lending rates on March 18, May 19, July 21, August 21 and September 15 this year. On Thursday, the central bank raised interest rates for the sixth time this year to cool the economy after inflation accelerated at its quickest pace since1996.

Such frequent rate hikes have been rarely seen in history. Meanwhile, the central bank ordered lenders to set aside more money as reserves on 10 occasions. The latest one percent increase of the reserve ratio was the biggest in four years.

The monetary policies, in the form of "combination punches" as described by analysts, aimed at strengthening the currency and guiding investment growth.

As the Central Economic Work Conference said next year the government would "strictly control the supply of money and credit and keep a close watch over supply rhythm". It was even more worthwhile to expect the "combination punches" in 2008.