China is likely to shift to a more abrupt tightening in monetary policy in 2011 if inflation rises beyond expectations, economists said yesterday.
China has officially stated that its monetary policy next year will be "prudent" but the rise in money supply target for 2011, reported at 16 percent, showed the policy may still be loose, they said.
"The reported 2011 monetary target showed that the central government is still pursuing a pro-growth path rather than a tightening next year as it is still concerned over a possible economic slowdown," said Stephen Green, head of research at Standard Chartered Bank in China.
"We think that inflation is the biggest concern for China," he said. "So, if inflation goes up as we expected, which is higher than market consensus, more controls may be introduced to control liquidity."
The bank forecast inflation at 5.5 percent in China next year, up from an expected 3.2 percent this year.
The Consumer Price Index rose to 5.1 percent in November to a 28-month high.
The target for new yuan loans in 2011 is likely to be the same as this year at 7.5 trillion yuan (US$1.1 trillion), Bloomberg News reported. The final figure has yet to be confirmed. Banks in China have extended 7.4 trillion yuan of loans in the first 11 months of this year.
Chinese leaders put more focus on the fight against inflation in their statement after an annual economic planning meeting over the weekend, but also vowed to strike a balance between price stability and growth.
Control of credit issuance is one of the most important monetary policy tools in China and many in the market have assumed that the government will lower the new lending goal next year as a way of tamping down on inflationary pressures.
But a report on the front page of the China Securities Journal, citing an unnamed source described as authoritative, suggested otherwise.
"The Chinese economy is very big now and a target of 7.5 trillion yuan in new loans will not trigger all-round inflation," the newspaper quoted the source as saying.
The newspaper also said the government would target the M2 money supply to grow 16 percent in 2011.
Wang Qian, a JPMorgan economist, said she expected new yuan lending of between 6.5 trillion yuan and 7 trillion yuan in 2011 and money supply to increase between 15 percent and 16 percent.