BEIJING (AFP) — China said Wednesday it would tighten monetary policy in 2008 for the first time in a decade, as it battles to rein in a soaring stock market and a red-hot economy at risk of overheating.
The country's decision-making elite announced a policy shift from "prudent" to "tight" in a move analysts said could have major significance, even though few concrete details were given about the changes ahead.
"This shows that the government is paying a lot of attention to the two questions of inflation and the bubble in assets prices," said Zhang Ming, a Beijing-based economist with the Chinese Academy of Social Sciences.
"This really is extremely important," Zhang said.
The shift to "tight monetary policies" was announced after the three-day Central Economic Work Conference, a closed-door meeting of top decision-makers from the Communist Party and government, Xinhua news agency said.
The conference, the most important economic gathering of the year, also made it a priority for 2008 to prevent overheating and curb inflation.
China's economy is expected to expand 11.5 percent this year, fuelled mainly by investment spending, according to Xinhua.
It will be the fifth consecutive year of double-digit growth, and 2008 is widely expected to see yet another year of growth in excess of 10 percent.
Growth is not seen to be as worrisome as inflation, which affects the personal fortunes of every single family in China -- and thus a direct impact on public support for the Communist Party's rule.
China expects increases in consumer prices to shoot to a 10-year high of 4.5 to 4.6 percent this year, due mainly to soaring food prices, state media said last week.
"The theme of 2008 is preventing overheating and inflation. Issues related to prices are most crucial for now," said Wang Tao, a Beijing-based economist with Bank of America.
One of the main underlying drivers of the speedy growth in China is an economy awash with liquidity, caused by a massive trade surplus.
The liquidity becomes a problem when banks lend money to people who use the money for speculative investments such as stocks or real estate. A default on loans could lead to a debt crisis.
"China will strictly control the volume and... pace of loans, so as to better regulate domestic demand," Xinhua said, citing the conference.
China's stock market has weakened in recent sessions, but the benchmark index remains up nearly 90 percent this year.
Decisions made by the Economic Work Conference set the outer limits of policies available to China's huge bureaucracy in the year ahead. Detailed measures are expected to emerge later.
Among concrete steps the government may undertake, the most likely is a new series of interest rate hikes, on top of the five that have taken place since early 2007, analysts said.
"Rate hikes may change the situation we have now with negative real interest rates," said Zhang, referring to the fact that interest rates currently do not beat inflation in China.
"That in turn will go some way towards coping with the trend of people taking money from their savings accounts and putting it in stocks and real estate."
The People's Bank of China, the central bank, immediately signalled its willingness to turn the broad outlines set by the conference into concrete policy.
Communist Party cadres at the bank held a meeting Wednesday afternoon showing support of the "spirit" of the conference, according to a statement on its website.
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