Hu Xiaolian, a deputy governor at the People’s Bank of
China, said monetary policy in the world’s second-largest economy needs to be
prudent to tame inflation, which hit a 28-month high of 5.1 percent in
November.
“The most important task of our monetary policy next year is
to steer overall money supply back to normal,” Hu said at a meeting with
Chinese bankers.
“Bank credit expansion must be in step with main economic
targets, especially when it comes to the targets for economic growth and
inflation,” she said.
Earlier this month, Chinese leaders said fighting inflation
will be a priority for 2011 and reaffirmed a shift to a prudent monetary
policy, from the previous “appropriately loose” stance.
Hu said the central bank will use a combination of policy
tools, including interest rates, reserve requirements, and open market
operations to steer policy back to normal.
“The basic tone is consistent with market expectations,”
said David Cohen, an economist at Action Economics in Singapore. “They are part
of a toolkit they have been using in a multi-dimensional approach with the aim
of constraining liquidity and inflation.”
Hu highlighted the importance of differentiated increases in
reserve requirements for selected banks - a tool it used twice in the three
months this year sans public announcements.
“The central bank will use differentiated reserve ratios in
a dynamic way to supplement regular monetary tools, such as interest rates,
reserve requirement ratios and open market operations.”
The central bank has increased reserve requirements six
times so far this year in a bid to drain excess cash from the banking system to
curb inflation.
The reserve requirement ratio has reached a record high of
19 percent for some of the country’s biggest banks.
The remarks will likely reinforce market speculation that an
imminent rise in China’s interest rates or reserve requirements is on the
cards.
Many investors believe China is set to tighten policy soon
in a strike against inflation, but investors are divided over whether the move
will come before the end of the year.
Bank of Communications, China’s fifth-largest lender, said
on Friday that it expects the central bank to increase reserve requirements by
at least 200 basis points next year.
A Reuters poll of 19 analysts this month showed a median
forecast for the reserve requirement to hit 20 percent by the end of 2011.
The central bank’s policy stance is a vote of confidence on
the country’s strong economic growth, which Hu acknowledged.
“Overall, external demand has improved and China’s economic
growth momentum is on a solid ground. We will be able to maintain stable and
relatively fast economic growth by implementing prudent monetary policy.”
