China Seeks to Tighten Liquidity

China Seeks to Tighten Liquidity Even as Growth Slows (Update1)

By Bloomberg News

July 7 (Bloomberg) -- The People’s Bank of China signaled it remains focused on reining in liquidity and stemming inflation even after evidence of slowing growth in the world’s third-biggest economy contributed to a global stock sell-off.

A surfeit of cash is still the main problem facing monetary policy, and PBOC should at an appropriate time use interest rates to address it, Yang Guozhong, director of the bank’s business management department, wrote in China Finance magazine. Zhang Jianhua, director of the research bureau, wrote in the China Daily that the PBOC must “deal with” excess liquidity.

The comments, including a dismissal by Zhang of risks of a double-dip slowdown in China, follow the biggest weekly drop in the nation’s benchmark stock index in more than a year. Analysts at banks from Goldman Sachs Group Inc. to BNP Paribas SA have lowered projections for the nation’s expansion in recent weeks as property sales tumble and manufacturing growth moderates.

“Price pressures have been building for almost a year now,” and inflation will likely accelerate in coming months, said Brian Jackson, a Hong Kong-based strategist at Royal Bank of Canada. “Today’s comments suggest that inflation and easy liquidity remain at the top of the PBOC’s agenda.”

The Shanghai Composite Index slipped 0.3 percent to 2,402.03 as of 1:08 p.m. local time. The gauge has declined about 27 percent since the start of the year as policy makers sought to rein in an economic expansion that reached an 11.9 percent annual pace in the first quarter.

Prudent Approach

Yang, writing in a biweekly PBOC publication, said China doesn’t yet have the economic foundation to adjust its pro- active fiscal policy and moderately loose monetary stance, indicating that the bank may take a prudent approach to raising deposit rates and borrowing costs.

Still, he didn’t exclude using interest rates to help control the excess liquidity that’s resulted from a lending surge aimed at supporting the government’s 4 trillion yuan ($590 billion) stimulus package.

Data next week may show that consumer prices rose 3.3 percent in June from a year before, exceeding Premier Wen Jiabao’s target of a 3 percent average for the year. The government may also report that gross domestic product rose 10.4 percent in the second quarter from a year ago, down from the 11.9 percent pace in the previous three months, according to the median forecast in a Bloomberg News survey.

Inflation Expectations

“In a post-crisis era, China’s monetary policy should still focus on consolidating economic recovery while at the same time soaking up liquidity at the appropriate times to prevent inflationary expectations from materializing,” Yang wrote.

In a commentary in the English-language China Daily today, Zhang said negative real interest rates will trigger resource misallocation in the longer term, even if they don’t affect the economy in the short term.

The impact of the “massive” amounts of liquidity injected into the market last year will surface sooner or later and will have to be dealt with, he wrote.

Separately, Zhang said July 3 that projects and spending under the government’s 4 trillion yuan stimulus package aren’t yet fully allocated and adjustments can be made according to future economic conditions, according to a transcript on the state-sponsored news portal china.com.cn of his comments to a real-estate forum in Boao, on the southern island of Hainan.