The newly announced switch from the current “moderately loose” monetary policy to that old favorite, “prudent”, next year is no more than a formal anointment of what has been going on for months: the withdrawal of the 4 trillion yuan ($600 billion) monetary stimulus to combat 2008’s global financial crisis to be replaced by the 2010 focus on the battle against inflation. The statement followed a Politburo meeting reviewing the new 5-year plan that starts next year.
Easy credit led to a lending boom that the central bank is now striving to rein in through reduced loan quotas, interest rate hikes and increases in banks’ reserve requirements. At the same time it has been introducing measures to reduce the demand for property, the final destination of much of the new lending. Yet inflation hit a 25-month high of 4.4% year-on-year in October and is expected to have been higher in November, way above the target of 3% and despite moves to reverse food price rises which account for about a third of the inflation number.
The brakes are being applied but not too abruptly. Growth has been slowed to 9.6% year-on-year in the third quarter, down from 10.3% in the second and 11.9% in the first. Beijing won’t want to see the economy decelerating for much longer, and will want to see it remaining robust enough to absorb further interest-rate rises and increases in banks’ reserve ratios. The Politburo left policymakers plenty of room to fine tune: macro-regulation should be more “targeted, flexible and effective” while fiscal policy should be “proactive”, the statement said. Proactive fiscal policy might just mean the introduction of a property tax, as a new IMF Working Paper recommends.