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China to squeeze credit to curb inflation
Updated: 2004-08-24 14:33

China must keep curbing credit to prevent a surge in bank loans and fight against inflation, central bank chief Zhou Xiaochuan said on Monday.

The government has taken a series of measures since late last year, including boosts to bank reserve requirements and a credit clampdown in some hot sectors, to cool its economy.

But the central bank chief said more needed to be done.

"The trend of expansionary demand and pressure of inflation have not alleviated so far," Zhou said in a statement published on the central bank's Web site (www.pbc.gov.cn).

"Banking departments must continue to control credit in an appropriate manner to prevent a quick increase in medium- and long-term loans," said the governor of the People's Bank of China.

The central bank has pledged to keep monetary policy tight, but has so far avoided raising interest rates as analysts say that could create problems for indebted state firms and put more pressure on the yuan to strengthen.

Markets previously had worried that, in stepping on the brakes, China might send its giant economy -- the world's seventh-largest -- into a sharp downturn and threaten one of the main engines of global economic growth.

Rising inflation has been a particular concern as Chinese authorities have debated whether to raise interest rates for the first time in nine years.

Still, a government think-tank and an official economics newspaper have recently called for an easing of the harsh curbs, which they said were pushing some companies to the brink.

Economic data for July have showed the austerity measures are working. But most private sector economists say it is too early for the authorities to loosen the curbs they have put in place.

"Banks must ensure they prevent credit from flowing into some blind investments and repetitive construction projects," Zhou said. "That will prevent a rebound in a quick growth in fixed asset investment."

The warning came after data showing China continuing to spend more heavily than expected on projects such as roads, power plants and factories in the January-to-July period.

Urban fixed-asset spending in the first seven months of 2004 rose 31 percent from a year earlier, the same growth rate as in the first six months of the year, official figures showed.

Economists polled by Reuters had expected a January-July increase of 20 percent.

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