BEIJING, Nov. 3, 2010 (Xinhua News Agency) -- The People's Bank of China (OOTC:BACHY) , China's central bank, said on Tuesday that it will gradually guide monetary conditions back to the normal state while continuing the comparative loose monetary policy.
It made the remarks in its Monetary Policy Implementation Report for Q3 published on November 2. .
This is the first time for the central bank to mention of returning monetary conditions back to the normal state although it reiterated to continue the moderately loose monetary policy.
Market started to talk about the exit of moderately loose monetary policy when the central bank announced to raise interest rate on Oct. 19.
Experts hold the wording of "return to the normal state" will strengthen the anticipation for the directional change of monetary policy, and the monetary policy may grow stringent in the fourth quarter.
China's monetary policy has basically shifted from being pro-active to being pro-steady, and the country is now standing on the first step of the interest rate increase channel, according to Jia Kang, head of Research Institute for Fiscal Science with the Ministry of Finance.
China may change the underlying tone of its macro economic policy in 2011 to a "proactive fiscal policy and prudent monetary policy" from current combination of "proactive fiscal policy and moderate loose monetary policy".
This policy change has been included in a report being drafted to outline the key topics for the upcoming Central Economic Work Conference, held once a year to set the tone for the following year's economic development, two policy advisors for the conference revealed.
In response to the international financial crisis, China rolled out a series of stimulus policies to boost the economy in 2009, and the situation of abundant liquidity has lasted until now.
The money supply increase has helped drive up inflation. China's M2 supply grew 27.7 percent year on year in 2009, and 19 percent by end-September this year, exceeding preset target of 17 percent for this year.
Therefore, it is necessary for China to guide the monetary conditions back to the normal state given mounting inflationary pressure.
China should pay greater attention to potential inflation pressure, the central bank said in the report.
In view of China's fast economic growth and the sluggish global economic recovery, China should also pay close attention to the expectations for inflation and the upward pressure on prices.
The central bank said that the world's major economies would continue the loose monetary policy to boost their economies. As a result, large amount of capital will speed up its flows into emerging economies.
In addition, China's labor and services costs are on the rise, so does the cost of resources and environmental protection measures. These factors may also influence the expectations for inflation, said the central bank.
China's Consumer Price Index (CPI) growth may set fresh high for this year in October -- a little higher than the 3 percent growth target set for the entire year, according to market observers.
Market predicts China's CPI growth at about 3.5 percent for 2011. (Edited by Hou Yujie, firstname.lastname@example.org)