China unlikely to ease monetary controls

Economic analysts believe China will maintain its monetary controls for some time, as the country's economy has been slow to recover and a rebound in inflation and housing prices may occur.

"The central bank may slightly cut interest rates and the reserve requirement ratio (RRR) sometime this year, but the current situation suggests less of a need for eased controls," said Lian Ping, chief economist at the Bank of Communications.

After a third-quarter monetary policy meeting held before the Mid-Autumn Festival and National Day holidays, the central bank said in a statement that it would continue implementing a prudent monetary policy, making it more targeted, flexible and forward-looking while fine-tuning it according to the development of the economic situation.

"Current economic and financial operations have shown signs of stabilizing and consumer prices are basically stable," the statement said.

The statement said the central bank would employ monetary tools to encourage the credit supply to grow at a steady and moderate pace, as well as maintain a reasonable social financing scale.

"Global economic growth remains weak. We will closely monitor the results of the stimulus policies recently issued by the European Union and the United States," it said.

The statement has been seen as a new policy orientation implemented by the bank in the face of changing international markets, particularly in light of the third round of quantitative easing (QE3) recently implemented in the U.S.

At home, the growth of the consumer price index (CPI), a major gauge of inflation, bounced to 2 percent in August, according to figures released by the National Bureau of Statistics.

Analysts said China's inflation might be lifted by price increases for agricultural products and imported inflation caused by QE3.

"The fresh round of monetary easing in the U.S. and European countries may result in increased commodity prices, which will lessen room for China to ease its monetary controls," said Lu Zhengwei, chief economist of the Industrial Bank.

China cautiously used monetary easing in recent years.

"Unconventional policies have barely been efficient in lowering interest rates and boosting the credit market amid the global financial turmoil," said a report published by the central bank in 2009, when the U.S., several European countries and Japan launched their first round of quantitative easing.

The report pointed out that unconventional policies contain huge risks that could deeply influence global economy.

"At that time, some people suggested that we resort to a zero interest rate policy, as some developed countries did. We had discussions. Though we could not judge whether we would fall into the 'liquidity trap' described by John Maynard Keynes, we did know it would be a very dangerous decision," central bank governor Zhou Xiaochuan said.

The central bank has cut benchmark interest rates and the RRR twice to buoy economic growth, which registered its lowest rate of growth in more than three years during the second quarter of 2012.

Despite increased speculation regarding more RRR cuts, the central bank favors more delicate monetary tools and will be reluctant to resort to blunt monetary instruments, the analysts said.

The central bank pumped a record 290 billion yuan (45.74 billion U.S. dollars) into the money market via reverse repurchase agreements last week in an effort to ease a cash crunch towards the quarter's end.

Nevertheless, market participants said that if China's economic slowdown cannot be checked, more monetary easing will come.