Tue, Dec 26, 2006 - Page 11 News List

China to remain `prudent'

STABILITY China's central bank admitted to problems with structural balance and over-reliance on resources while pledging to take more action on market liquidity


China will continue with its "stable and prudent" monetary policy to further reform its exchange rate system and control market liquidity next year, the People's Bank of China said today.

The bank, after the latest quarterly meeting of its 13-member monetary policy committee, said it would strengthen liquidity control by "reasonably" curbing lending growth next year and keeping inflation stable.

In a statement on its Web site summing up the proceedings of the meeting, the bank said that while the economy was generally functioning well, it still faced challenges.

"The economic situation is good overall, but it still faces problems such as structural imbalances, an overly resource-intensive growth model and unbalanced international payments," the central bank said.

The bank said it would continue implementing a stable monetary policy while trying to improve controls on liquidity in the banking system. It did not elaborate.

China is striving to ease its enlarging trade surplus, which has made its foreign-exchange reserves the world's largest and flooded the country's market with excessive liquidity. The central bank raised key lending rates twice and increased reserve requirements three times this year to contain the ability of commercial banks to lend.

That campaign has also involved administrative measures such as stricter approval procedures for new investment projects.

In response, annual growth in fixed-asset investment slowed to 26.6 percent in the first 11 months from a peak of 31.3 percent in the first half of the year.

Broad money supply grew at 16.8 percent last month amid tightening of liquidity, slowing from a 17.1 percent expansion in October, the bank said.

It repeated its pledge to reform the exchange rate system for market demand and supply to play a "fundamental" role in setting the rate. It said it would keep its currency "stable at a reasonable and balanced level."

Since it revalued the yuan by 2.1 percent and decoupled it from a dollar peg in July last year, Beijing has frequently said that it was committed to letting the yuan become more flexible over time, but that it must do so at its own pace, despite US pressure to allow it to appreciate more quickly.

The yuan has now appreciated a further 3.7 percent since the revaluation, with the pace having picked up in recent months, but many US critics say it remains seriously undervalued, giving Chinese exports an unfair advantage in global markets.

Many economists and officials say that the Chinese economy relies too much on fickle investment and exports and not enough on household consumption, exposing it to greater risk of a downturn and contributing to trade friction.

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