The central bank said on Friday it will "strictly" implement a tight monetary policy this year to help anchor the economy.
The policy will help prevent the economy from overheating and structural price rises from evolving into entrenched inflation, the People's Bank of China said, as it wrapped up its 2008 work conference.
Almost all the nation's recent economic indicators have pointed to an urgent need to realign the economy to a more stable growth track.
GDP expanded by 11.5 percent in the first three quarters last year, 0.7 of a percentage point higher than the same period of 2006.
The CPI, a key inflation gauge, hit an 11-year high of 6.9 percent growth in November and it was the fourth consecutive month it exceeded 6 percent. The central bank early last year set a target of 3 percent for CPI growth for 2007.
High fixed-asset investment growth and money supply statistics in recent months have also raised caution among policymakers, analysts said.
The central bank raised the interest rate six times last year and increased banks' reserve requirements, or the money they must hold in reserve, 10 times to hold back the sizzling economy.
The central bank drained a net 503 billion yuan - including the latest bank reserve ratio hike that came into effect on December 25 - from the market last week, one of its biggest weekly net drains ever.
The central bank is widely expected to significantly tighten credit this year to cool down the economy. The commercial banks are reportedly required to report their lending plans on a monthly basis to the regulator so that it can better manage overall liquidity.
But analysts said policymakers should be cautious to prevent major swings in the economy.
If credit is in short supply while the world economy slows significantly in the second half of this year, the Chinese economy could be dragged down as well, said Wei Weixian, an economist at the University of International Business and Economics.
"If that happened, the banks would have to increase lending, which may lead to a jump in economic growth."
The central bank said that while it will tighten monetary policy, it will also adjust the structure of bank lending.
It will direct more lending to aid small and medium-sized enterprises, those that mainly rely on self-innovation for growth, energy-saving and environmental projects and employment-friendly sectors as well as agriculture, according to the central bank.
Source: China Daily
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