Opinion

Pre-emptive tightening

(China Daily)
Updated: 2010-10-13 14:53

The elbow-room for Chinese monetary authorities to tame looming inflation has considerably decreased as other major central banks are stepping up quantitative easing to prevent a double dip.

It is obvious that any hike in interest rates will encourage a faster inflow of foreign capital into China, complicating efforts to control excess liquidity growth.

However, the latest decision by the People's Bank of China to immediately raise reserve requirements for six large commercial banks on a temporary basis shows that Chinese policymakers are more resolved than expected in fighting inflation.

It is estimated that the 50-basis-point increase, which takes the required reserve ratios to 17.5 percent for the country's biggest lenders, will mop up liquidity in the banking system by around 170 billion yuan ($25.5 billion).

The move can be either read as a warning for those bigger lenders who may have granted too many loans last month in the face of the country's endeavors to clamp down on credit expansion. Or, it can be viewed as a response to the need to sterilize excess domestic liquidity resulting from the growing trade surplus and foreign direct investment.

In both cases, the hike in the reserve ratio indicates the central bank's growing worries about liquidity management, in spite of the domestic argument against over-tightening.

Related readings:  ADB expects lower inflation rate in China  Consumer price inflation accelerates in August  Mainland economy healthy but inflation a worry  China likely to fulfill full-year inflation target: NDRC

It is true that the Chinese economy may risk losing too much momentum after its growth peaked in the first quarter. The global growth prospect is also no cause for optimism, as major advanced economies are preparing for years of meager growth, if any.

These are reasons for the central bank to be cautious about taking tightening measures. But they do not justify a further delay in pre-emptive moves to control asset prices and inflation risks.

On one hand, the public's wait-and-see patience has apparently worn very thin as the country's efforts to bring down property prices have borne little fruit.

Housing prices in 70 major Chinese cities still rose 9.3 percent in August from the year before. If the rocketing property prices cannot be brought down quickly, a re-surge in house purchases will give rise to a super property bubble that the country cannot afford.

On the other hand, climbing consumer inflation, which had already turned the real deposit interest rate negative for months might be surprisingly hard to rein in.

The widespread forecast that the country's consumer inflation should already have peaked in the past few months, now needs a reality check, as latest statistics suggest that food prices were rising significantly in many Chinese cities in late September.

Given the huge amount of bank lending, the hike in the reserve ratio is unlikely to make a big dent on the country's overall liquidity supply. But the message that China's central bank is draining cash from the economy is unmistakable.

And that is in line with the country's economic situation.