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China to stick to tight fiscal policy

China will stick with a “tight” monetary policy as the country faces increasing pressures of inflation and over-investment amid global market turmoil, central bank chief Zhou Xiaochuan (周小川) said.

China needs to correctly handle the “pace, focus and magnitude of macroeconomic controls to avoid large fluctuations and maintain stable and relatively fast economic growth,” Zhou, governor of the People’s Bank of China, said during the IMF meeting in Washington.

China is trying to prevent a flood of cash from the trade surplus and foreign investment from fanning inflation that is already at an 11-year high. The nation has accelerated the yuan’s appreciation this year to ease pressure on inflation.

The currency has strengthened 4 percent against the US dollar this year, bringing the yuan’s advance to 18.4 percent since the end of its peg to the dollar in 2005. The currency closed in Shanghai on Friday at 7.0065 per US dollar.

“The exchange-rate has limited impact on adjusting the trade imbalance,” Zhou said. “Over-exaggeration of its function is not only impractical but will also misguide the course of such an adjustment.”

US Treasury Secretary Henry Paulson said last week in Beijing it was “dangerous” for the exchange rate not to reflect the fundamentals of the world’s fourth-largest economy.

A slowing world economy has helped promote trade protectionism, Zhou said, urging all governments to stand up against such sentiment.

Financial market turbulence triggered by the US subprime meltdown is the biggest problem this year, Zhou said. Developed nations should shoulder the main responsibilities of stabilizing global financial markets and adjust their own economic policies accordingly, he said.

Emerging markets need to “closely” monitor trade and the change of capital flows to enhance their ability to buffer impacts from the outside and to ensure the healthy development of their own economies, China’s central bank governor said.


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