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[Analysis] China likely to keep prudent monetary policy, allow fine-tuning   2011-11-29 20:43:58

While speculation builds up for possible changes to China's macroeconomic control policies, Chinese analysts have urged the government to stick to a prudent monetary policy while allowing for more fine-tuning.

The world's second-largest economy still faces a worsening external environment and the threat of inflation with the eurozone debt crisis evolving and prices rising faster than desired, said Wang Tongsan, head of the Institute of Quantitative and Technical Economics under the Chinese Academy of Social Sciences (CASS).

Quantitative easing policies, which are likely to be put into place in the United States and Europe to help solve the debt crises there, may create additional inflationary pressure for China, he said.

"Therefore, it's currently inappropriate to adjust the general direction of China's macroeconomic control policies," said Wang.

An interest rate drop is not a priority to consider in the short term, as China's interest rates remain below the inflation level, he said.

However, Wang noted that decreasing the reserve requirement ratio (RRR) may a practical choice in the future.

China's central bank has raised interest rates three times and hiked the RRR six times this year, driving inflation down to 5.5 percent in October from 6.5 percent in July. The figure is still well above the government's full-year target of 4 percent.

The nation's major banks are currently required to set aside a record high of 21.5 percent of their cash in reserve.

The People's Bank of China (PBOC) last week rolled back RRRs for six rural banks in the eastern province of Zhejiang to 16 percent from the previous 16.5 percent.

The move followed an HSBC report which stated that China's manufacturing Purchasing Managers Index (PMI) for November will decline to 48, the lowest level in 32 months, from October's reading of 51. The report has triggered speculation that an all-around loosening of the country's monetary policy is imminent.

However, the PBOC said the move was made to normalize the effects of last year's 50-basis point RRR hike.

Tightened supplies of money have made it harder for China's small businesses to borrow from banks, which prefer to lend to bigger, state-owned firms for their stability.

Yu Bin, director of the Macroeconomic Research Department of the Development Research Center of the State Council, or China's Cabinet, said the difficulties small businesses have had in securing financing have been encountered by small businesses in other countries and cannot be solved by a looser monetary policy.


source : Xinhua     editor:: Ma Ting
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