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PBOC: Recovery to strengthen despite inflation pressures

By Xin Zhiming (China Daily)
Updated: 2010-01-30 08:11

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The central bank said on Friday that China's economic recovery is "likely to strengthen" this year while it will face intensifying inflationary pressures.

Policymakers, however, may not keep policies "over-tight", analysts said.

The country will continue to adopt a moderately relaxed monetary policy and active fiscal policy, while making them more targeted and flexible, the People's Bank of China said in a report analyzing the economy in the fourth quarter of 2009.

China's GDP expanded 8.7 percent year-on-year in 2009, but the fourth quarter saw a fast pace of 10.7 percent, and economists expect it to gain further momentum in the first quarter of this year.

Meanwhile, ample liquidity in the financial system and the rising inflationary menace have increased expectations that policymakers will tighten policies soon. The stock market has dropped recently as investors remain uncertain over how tight the policy will be.

The central bank said inflation may intensify this year due to rising international commodity prices, still ample domestic money growth, rising demand and possible domestic adjustments to utility and resource prices.

But it also said that a good harvest and industrial overcapacity would limit price increases.

China's consumer price index (CPI), a major gauge of inflation, rose 1.9 percent in December from 0.6 percent in November. Some analysts have forecast that the country's inflation could pick up to high levels, such as 5 or even 8 percent in certain months, but they still maintain the government can keep it at a satisfactory level of around 4 percent.

"Despite the recent pickup in CPI, we see inflation remaining moderate and within the government's target in 2010, at 3 to 4 percent," said Wang Tao, chief of China economic research at UBS Securities.

She forecast China's GDP may expand 9 percent this year and it could be adjusted upward if export growth and lending are unexpectedly strong this year. But "with the ongoing policy tightening, growth in the second half is expected to decelerate to about 8.5 percent year-on-year", she said.