Fiscal policy changes from prudent to tight

CHINA will shift its monetary policy "from prudent to tight" next year to prevent its economy from overheating and to try to contain accelerating inflation.

The decision was made at the Central Economic Work Conference, which top Chinese leaders hold every December to draft policies for the coming year.

The conference decided to "strictly control the volume and granting pace of loans so as to better regulate domestic demand and balance international payments."

China's economy is expected to grow by 11.5 percent this year, with a government think tank predicting just a marginal slowing next year to about 10.8 percent. The consumer price index, meanwhile, hit 6.5 percent in October, matching the highest rate in a decade, and well above the government's target of three percent.

The conference said that with prudent fiscal policy and tight monetary policy, China aims to accomplish two goals of prevention next year: "To prevent economic growth moving from rapid to overheated, and to prevent price rises shifting to evident inflation."

President Hu Jintao and Premier Wen Jiabao both delivered speeches at the three-day conference that ended yesterday.

To cool lending, the central bank has lifted interest rates five times this year, bringing the benchmark rate on one-year loans to the current 7.29 percent.

"A tight monetary policy can develop a progressive effect which will help curb the overheating in markets of assets, including equities and real estate, and then cap price rises," said Cao Honghui, an economic researcher with the Chinese Academy of Social Sciences.

China has been implementing a prudent monetary policy since 1997. From 1998 to 2002, the country increased money supply to counter deflationary pressures.

Starting from 2003, the monetary policy began to tighten in order to help address changes in economic development, including the rapid growth of credit extension, investment and foreign exchange reserves.

"The new policy reflects the central government's accurate judgment of China's current economic situation which is under pressure from further price rises and an unduly fast growth of loans," said Peng Xingyun, a senior researcher with the Research Institute of Finance under the Chinese Academy of Social Sciences.

Other points made by the conference included:

Fiscal expenditure must be optimized to facilitate industrial restructuring and coordinate regional development.

The fundamental role of agriculture in China's economic growth must be consolidated to secure grain crops.

Technical innovation should be based on market demand and be centered upon core technologies.

Prices, taxations and financial policies should be used as an incentive to stimulate energy conservation.

Environmental protection and emission reduction should be crucial.

More financial aid must be channeled to undeveloped regions.