China Plans to Align Policies, Cut Trade Surplus

China plans to better coordinate fiscal and monetary policies in 2008 to reduce its trade surplus and mop up excessive liquidity, Vice Finance Minister Li Yong said today.

This year's fiscal policy will focus on structural adjustments and help essentially solve the problem of excess liquidity, Li said at a conference in Beijing. Monetary policies should focus on quantitative controls to win more time for structural reforms. China also needs to use administrative measures to tackle these issues, he said, without being specific.

China's money supply grew at the slowest pace in seven months in December, the central bank said yesterday, after it took measures to cool inflation and prevent the economy from overheating. China may face pressure from Europe and the U.S. to allow faster gains by its currency after the nation's trade surplus surged 48 percent to a record $262.2 billion last year.

Fiscal policy can play a bigger role, said San Feng, an economist at the State Information Center in Beijing. The government this year needs to cut its fiscal deficit and debt issuance for long-term construction projects, and it should lower taxes on sectors affected most by price controls.

The government will adjust resource prices this year to rectify a distorted energy-pricing system and boost domestic spending as its top priority, Li said. Weakness in the U.S. dollar will limit China's ability to raise interest rates and reserve ratios further, he added.

Inflation Target

China's central bank has pledged a tight monetary policy this year, after six interest-rate increases in 2007, to curb lending and prevent escalating asset prices.

We will decisively fight against inflation and implement tight monetary policies, said Yi Gang, vice governor of the People's Bank of China, at the same conference today. But we will do it prudently to ensure economic stability.

Consumer prices jumped to an 11-year high of 6.9 percent in November, prompting Premier Wen Jiabao to announce on Jan. 9 a freeze on energy and utility price gains in the near term.

The government needs to avoid high inflation expectations, said Xu Lin, head of the fiscal and financial department of the National Development and Reform Commission, at today's conference. If price increases slow down, the temporary measures to curb prices can be eased.

China has set a preliminary target for the full-year inflation rate at 4.6 percent in 2008 and that for annual economic growth at 8 percent, Xu said. Both targets need to be officially set at the sessions of the National People's Congress, or the country's parliament, which are scheduled to be convened in March, he added.

Yuan Appreciation

The yuan rose for a fifth week, reaching the strongest level since China scrapped a fixed exchange rate to the dollar in 2005, on speculation China is seeking faster gains to cool the economy. The U.S. and Europe say the yuan, even after recent advances, is still at a level that gives local companies an unfair advantage in overseas markets.

The December trade surplus shrank to $22.7 billion from $26.2 billion in November, as exports grew at the slowest pace in two years, indicating recent yuan gains, the cooling global expansion and cuts to export-tax rebates on polluting industries are beginning to bite.

The banking regulator last quarter banned Agricultural Bank of China and six other banks from making new loans, according to the official Shanghai Securities News.

China's economy probably expanded 11.5 percent in 2007, the fastest pace in 13 years, according to government forecasts.

China Raises Rates to Nine-Year High on Inflation

China raised interest rates for the sixth time this year to cool the world's fastest-growing major economy after inflation accelerated at the quickest pace in 11 years.

The benchmark one-year lending rate will increase by 0.18 percentage point to a nine-year high of 7.47 percent, starting tomorrow, the People's Bank of China said today on its Web site. The one-year deposit rate will rise by 0.27 percentage point to 4.14 percent.

Consumer prices rose 6.9 percent in November, property prices climbed at the fastest pace in two years and the main stock index has more than doubled in 2007. Higher borrowing costs and 10 increases in banks' reserve requirements have failed to stem the gains, underscoring government concern the economy may overheat.

Inflation expectations are rising and the central bank really needs aggressive action to cool them, said Stephen Green, senior economist at Standard Chartered Bank Plc in Shanghai. They will get even more aggressive from now on.

It's the third time this year that China has raised deposit rates by more than lending rates to curb asset-price gains by encouraging people to keep their money in the bank.

The central bank said higher rates were needed to curb overheating.

House prices in 70 major cities jumped 10.5 percent in November from a year earlier. The benchmark CSI 300 Index of stocks has climbed 147 percent this year.

Inflation Surges

Inflation jumped in November on fuel and food costs. Chinese households' concern about rising consumer prices is at the highest level since a survey began in 1999, the central bank said earlier today.

China should let its currency appreciate, given mounting inflation, growing asset bubbles and possible overheating, U.S. Treasury Secretary Henry Paulson said this month.

The yuan has gained more than 12 percent against the U.S. dollar since the end of a peg in July 2005. Before the rate announcement, the yuan closed at 7.3694 versus the dollar and the CSI 300 Index climbed 1.8 percent.

A stronger Chinese currency would help cool inflation by lowering import costs and slowing money inflows from a trade surplus that surged 52 percent in the first 11 months to $238.1 billion.

Bank Reserve Requirements

In addition to interest rates, the People's Bank of China has sold bills to absorb cash and raised the proportion of deposits lenders must hold as reserves to 14.5 percent from 9 percent at the start of this year.

Raising the reserve requirement has become more symbolic than substantial, said Kevin Lai, senior economist at Daiwa Institute of Research in Hong Kong. At the end of the day, the root cause is the trade surplus. China needs a one-off currency revaluation to reduce inflation and liquidity inflows.

China's economy, the world's fourth largest, expanded 11.5 percent in the third quarter from a year earlier.

Growth is likely to slow to 10.5 percent in 2008 from 11.4 percent this year on tightening measures, the Asian Development Bank said this month. The Organization for Economic Co-operation and Development forecasts a decline to a 10.7 percent pace on reduced demand for exports.