Central bank vows tight policy to rein in economy

Updated: 2007-07-04 08:53

China will keep tightening monetary policy to prevent the economy from overheating and will stick to its long-standing policy of gradual yuan appreciation, the central bank said on Tuesday.

"China should appropriately tighten monetary policy amid stability," the People's Bank of China said in a summary of the second-quarter meeting of its monetary policy committee.

The phrasing echoed that used by Premier Wen Jiabao on June 13.

Although some analysts interpreted Wen's remarks as portending a tougher monetary policy, the central bank has since kept interest rates and banks' required reserves unchanged.

The PBOC's brief statement used familiar language to restate China's policy towards the yuan.

"China will perfect the managed floating exchange rate system to allow market supply and demand to play a fundamental role in determining the yuan's exchange rate and to keep the yuan basically stable at a balanced and reasonable level," the PBOC said.

The yuan has been scaling successive highs in recent days. The currency rose as high as 7.5929 per dollar on Tuesday, marking a 6.8 percent gain since it was revalued by 2.1 percent two years ago and freed from a dollar peg to float in managed bands.

China is enjoying its fifth straight year of double-digit economic growth. Figures for the second quarter due on July 18 are expected to show that gross domestic product expanded at around the first-quarter pace of 11.1 percent.

"China should strengthen and improve macroeconomic controls to prevent relatively fast economic growth from overheating," the central bank said.

Annual consumer price inflation rose to 3.4 percent in May, above the central bank's 3 percent target, although non-food inflation remains subdued.

The PBOC said it would resort to a range of monetary policy tools to keep inflation in check and achieve "reasonable" growth in money and credit. To that end it would strengthen the management of banking system liquidity.

The central bank has already raised interest rates twice this year and required reserves four times to hold down inflation and mop up cash pouring into the economy from China's record trade surplus. It last raised rates on May 18.

Zhao Qingming, an economist with the China Construction Bank in Beijing, said the central bank would have to work even harder to soak up liquidity this month because the trade surplus probably surged in June.

"The trade surplus will definitely be huge in June as exporters scrambled to make shipments before cuts in export tax rebates went into effect. That will translate into huge foreign capital inflows for China," he said.

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