Beijing warned over inflation

HONG KONG: Beijing needs to tighten its monetary policy to avoid a property bubble and runaway inflation, or face an economy growing at a superheated 16 per cent this year, a top government research institute warns, according to the South China Morning Post.

The assessment, by economists He Fan and Yao Zhizhong of the Chinese Academy of Social Sciences, comes in the face of a promise by Premier Wen Jiabao two weeks ago to keep a "moderately loose" monetary regime this year.

But sticking to a loose monetary policy could force up consumer prices and result in "serious economic overheating", the economists warn.

Predicting property prices to remain high, they say the bigger the property bubble, the greater the risks to the economy.

"If the loose monetary measures are withdrawn, the economy will grow at 7.7 per cent this year," He and Yao wrote in Monday's China Securities Journal. "If they remain the same, the economy is destined for serious overheating."

An appropriate level of monetary stimulus would propel the economy ahead with 11.6 per cent growth this year, they added.

Other leading state researchers, including Fan Gang, an adviser to the People's Bank of China, last month warned of bubbles in stock, real estate and commodity prices.

At the weekend, Beijing ordered the central bank and China Banking Regulatory Commission to step up scrutiny of bank lending to prevent an illegal flow of funds and foreign "hot money" into the property market.

He and Yao said loose monetary measures had added to new lending in the first 10 months of last year, with about six trillion yuan (HK$6.81 trillion), or two-thirds of a total of 8.9 trillion yuan, pouring into stock and property markets.

The surge in new lending spilled into the first week of this month, with loans totalling 600 billion yuan, the Economic Information Daily, a newspaper affiliated to Xinhua, reported yesterday. In January last year, new loans skyrocketed to 1.62 trillion yuan after the government loosened lending to kick-start a slowing economy.

He and Yao said a tougher monetary regime could cool the rapid growth in broad money supply, or M2, to about 20 per cent this year. M2 jumped 29.5 per cent between January and October last year. That would also keep inflation in consumer prices in check.

Peter Wong Tung-shun, an executive director at HSBC's Asia-Pacific unit, said the mainland's import sector, which was driven by domestic demand, would grow faster than exports even though China had became the world's largest exporter.

"The challenge for China is to strive for balanced growth, further stimulate domestic consumption and to build on an increasingly broad-based expansion," Wong said.

Merrill Lynch-Bank of America economist Lu Ting said a sharper-than-expected rebound in exports, at 18 per cent growth, and imports, at 56 per cent growth, last month, set the stage for a faster economic recovery on the mainland.

"China is on the eve of a monetary tightening," Lu said, forecasting economic growth of 10 per cent this year. "But, we are not there yet."

UBS economist Wang Tao said he would not be surprised to see new loans surpassing 1 trillion yuan in the first three months of this year. - SCMP

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