My Yahoo!China central bank vows prudent monetary policy, stable yuan in 2006 - UPDATE
02.21.2006, 04:27 AM
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BEIJING (AFX) - China's central bank said it will pursue reasonable credit growth this year but noted that its prudent monetary policy is facing challenges from external imbalances.
The People's Bank of China (PBOC) made the comments in its first quarterly monetary report for 2006, which reiterated its commitment to a prudent monetary policy and stable exchange rate.
'The central bank will maintain a prudent monetary policy and maintain the continuity and stability of monetary policy,' said the report, posted on the PBOC website.
It also vowed to keep the yuan stable at a reasonable level this year.
'(China will) perfect the management of the floating exchange rate mechanism, let market supply and demand play a fundamental role in the renminbi (yuan) exchange rate and maintain it at a reasonable and balanced level,' the report said.
The nation revalued the yuan by 2.1 pct against the dollar in July last year, scrapping its 11-year-old peg against the US unit in favor of a basket of currencies.
The move was a bid to help ease international trade tensions arising from its burgeoning current account surpluses and to regain greater control over its monetary policy, which had been undermined by capital inflows betting on an appreciation of the yuan.
More than six months on, however, the PBOC acknowledged that external imbalances are still impacting on monetary management.
'The efficiency and flexibility of monetary policy is facing challenges from the imbalances of international balance of payments,' the report said.
It said the recent rise in broad M2 money supply, for example, was largely due to foreign exchange sterilization.
The PBOC has been aggressively tightening liquidity since late last year, trying to mop up destabilizing excess credit via bill issuances.
The central bank singled out the problem for mention in its report, saying it would strengthen monitoring of short-term capital inflows.
But it also noted that growth in foreign exchange reserves had shown signs of a slowdown.
China's reserve holdings reached a record 818.9 bln usd at the end of last year and could surpass those of Japan's -- the world's largest foreign exchange holder -- this year.
Despite its strong financial position, Beijing has pursued the mantra of gradualism in its move to a more market-based economy while it tries to develop the financial infrastructure needed to support the transition.
The PBOC signalled in the report that more reforms were pending in the area of interest rates, promising to actively adjust the rediscount rate and to launch more interest rate derivative products.
It also said it will 'keep pushing forward state-owned commercial bank reform' and 'deepen policy bank reform', reiterating its earlier commitments to financial sector restructuring. The quarterly report noted that the environment for growth looks positive in 2006.
'Overall, the current domestic situation is good for China's economy's stable and healthy development,' the PBOC said.
It cited the 2006 economic and inflation growth targets of eight and three pct respectively set by China's leaders at last year's central economic work meeting.
In 2005, China's gross domestic product expanded by 9.9 pct while the consumer price index registered 1.8 pct growth.
However, the bank sounded warning bells over China's continued, rapid expansion of fixed asset investment, which posted year-on-year growth of 25.7 pct in 2005.
'From the perspective of investment demand, there are uncertainties surrounding fixed asset investment,' the report said.
'First, some negative effects from earlier blind investment are now gradually appearing. Second, there are still a large number of projects under construction and planned for construction. Fixed asset investment is under pressure to rebound.'
The report also predicted that China's producer price index (PPI) would see slower growth this year, without specifying a figure. China's PPI rose 4.9 pct in 2005.
The report blamed overcapacity in the steel and aluminum industries for the lower prices.
Uncertainty over grain prices could also drive the country's consumer price index lower this year, the central bank added.
China's CPI rose 1.8 pct in 2005, with some economists predicting strengthening inflation this year and others warning of the risk of deflation.
(1 usd = 8.05 yuan)
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