China's central bank kept up its rhetoric against inflation and excess liquidity on Friday, saying it will deploy a range of policy tools to head off inflationary pressure and asset bubbles. Hu Xiaolian, a deputy governor at the People's Bank of China, said monetary policy in the world's second-largest economy needs to be prudent to tame inflation, which hit a 28-month high of 5.1 percent in November.
"The most important task of our monetary policy next year is to steer overall money supply back to normal," Hu said at a meeting with Chinese bankers. "Bank credit expansion must be in step with main economic targets, especially when it comes to the targets for economic growth and inflation," she said.
Earlier this month, Chinese leaders said fighting inflation will be a priority for 2011 and reaffirmed a shift to a prudent monetary policy, from the previous "appropriately loose" stance. Hu said the central bank will use a combination of policy tools, including interest rates, reserve requirements, and open market operations to steer policy back to normal.
"The basic tone is consistent with market expectations," said David Cohen, an economist at Action Economics in Singapore. "They are part of a toolkit they have been using in a multi-dimensional approach with the aim of constraining liquidity and inflation." Hu highlighted the importance of differentiated increases in reserve requirements for selected banks - a tool it used twice in the three months this year sans public announcements. The central bank has increased reserve requirements six times so far this year in a bid to drain excess cash from the banking system to curb inflation.
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