Business / Markets

IMF hails monetary adjustment

By Chen Jia, Wang Xiaotian in Beijing and Shan Juan in Nanchang, Jiangxi (China Daily) Updated: 2012-06-09 09:04

China's timely adjustment of monetary policies to stabilize growth and its strong determination to support higher quality growth has won applause from international economists, who are looking forward to a faster reform process to contribute to the rebalancing of the world's economy.

"We support the authorities' ongoing effort to promote higher quality growth while at the same time fine-tune macroeconomic policies to help ensure that growth does not slow too much," International Monetary Fund First Deputy Managing Director David Lipton said on Friday.

Lipton made the comments after a meeting with Vice-Premier Wang Qishan and a discussion with People's Bank of China Governor Zhou Xiaochuan.

As the downside risks are becoming more significant in European economies, which threatens China's economic outlook, the country has space for a "forceful response" but the main line of defense this time should be "on-budget fiscal stimulus", according to Lipton.

He said these measures should include raising household incomes, liberalizing the financial system and strengthening the social security system.

On Thursday, the central bank announced a lowering of the benchmark one-year interest rate by 25 basis points, the first cut since December 2008, to combat a further slowdown while the Europe's debt crisis threatens global growth.

Meanwhile, the central bank said the discount lenders can offer on the key lending rate had been increased from 10 percent to 20 percent, and banks can offer savers deposit rates up to 10 percent higher than the benchmark

Lipton said that was a milestone in China's interest rate liberalization process.

"That will lower the cost of financial intermediation and allow market forces a greater role in pricing loans," he said.

Robert Mundell, a Nobel Prize-winning economist, told China Daily on Friday that it was a good idea to lower interest rates and more cuts in the reserve requirement rate are expected.

"The effects will be seen in the long run," Mundell said.

The IMF predicted that a hard landing is impossible for China's economy with the ongoing policy stimulus, although this year's growth may moderate to about 8 percent amid slowing global demand.

In addition, inflation is likely to remain below 4 percent for the whole year barring further shocks to food supply or global commodities, according to the IMF.

Li Daokui, a former adviser to the central bank's monetary policy committee and a professor at Tsinghua University, said China's inflation rate will further ease to about 3.1 percent in May, before moderating to 2.6 percent in July.

The consumer price index, a main gauge of inflation, moderated to 3.4 percent year-on-year in April in line with market expectations, compared with March's 3.6 percent.

Li said the GDP growth rate would start to rebound in the third quarter, with the figure rising to 8.1 or 8.2 percent by the end of this year.

"The new round of stimulus will be essentially different from the 4 trillion yuan package rolled out in 2008 and 2009. It will be a pragmatic, diverse and targeted package, which aims to facilitate the real economy," he said.

He made the remarks while attending the Asia-Pacific Economic Cooperation China CEO Forum held in Beijing.

However, some economists still remain cautious about the prospects for economic growth and call for more policy easing.

Zheng Xinli, vice-chairman of the China Center for International Economic Exchanges, who is also a guest economist of China Daily, said the growth rate of the world's second-largest economy might even fall below 7 percent, if industrial output continues to lose steam.

China would resort to more cuts in the reserve requirement ratio for commercial lenders instead of further lowering interest rates before the end of this year, said Li.

In the short term, cuts in the RRR would be more effective than interest rate cuts as liquidity remains tight due to the increasing willingness of enterprises and individuals to exchange yuan for foreign currencies such as the US dollar, Li added.

In a related development, China said on Friday it will provide subsidies and discount loans to encourage private investment, in the latest step by policymakers to shore up the slowing economy.

Private investment accounts for more than 60 percent of China's total fixed-asset investment, the National Development and Reform Commission, the country's top economic planning agency, said in a statement.

China's policymakers are stepping up efforts to boost the economy after growth fell to 8.1 percent in the first quarter of this year - its slowest pace in nearly three years.

The State Council said last month Beijing would encourage private investment to play a greater role in sectors such as transport, energy, telecommunications and mining.

The NDRC said investment by the private sector had become "an active force in promoting the stable and fast growth of the national economy".

The government will offer subsidies and discount loans to qualified private investment projects and support private venture capital firms by taking a stake or providing financing guarantees, it said.

It will also help eligible private investment projects get credit from international financial organizations and foreign governments.

AFP contributed to this story.

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