Prudent Chinese monetary policy mean business in 2013

With the Chinese economy showing signs of steady pick-up, analysts have said the momentum could make authorities stick to a conservative monetary policy in 2013, otherwise inflation could erode the previous gains.

The Chinese government has vowed to kept its monetary policy "prudent" in 2013, maintaining such a tone for three years in a row. Compared with previous practice, more rigorous implementation of the policies will be seen over the next 12 months, analysts predicted.

Last year, the central bank enforced a relatively loose monetary policy in a bid to stimulate the limped economy. But this year will see truly prudent practice, as inflationary pressure is piling up, according to Lian Ping, chief economist of the Bank of Communications.

To prevent the economy sliding further, the central bank cut benchmark interest rates twice and twice lowered the the amount of cash that commercial banks could set aside in reserves.

The Purchasing Managers' Index for the manufacturing sector, a barometer of the country's economic performance, rose to 50.6 percent in December, staying above the boom-and-bust-line of 50 percent for three straight months.

"Therefore, we predict this year's GDP growth will accelerate a bit from last year, and consumer prices will also climb. So the monetary policy will not be necessarily loosened," said Lian.

China's economic growth dipped to 7.4 percent in the third quarter of 2012, its weakest in more than three years, according the National Bureau of Statistics. But growth has been picking up steadily since October on the back of a slate of policies aimed at boosting economic expansion.

Analysts have generally agreed that GDP is likely to grow by eight percent in 2013, and the Consumer Price Index will top three percent.

Hua Zhongwei, a researcher with Huachuang Securities, said the global monetary expansion will push up commodity prices, which will certainly affect domestic prices.

According to Lu Zhengwei, chief economist with the Industrial Bank, China's broad money supply growth is targeted at around 14 percent, and the new yuan loans target is 9 trillion yuan. Both goals are relatively loose.

But considering the increased pressure of inflation, authorities are expected to tighten monetary supply in the latter half of the year, he noted.

UBS economist Wang Tao predicted inflation will rebound above 3.5 percent in mid 2013 and credit expansion will slow in the latter half of the year. The possibility of a hike in interest rates can not be ruled out, Wang added.

Central banks have traditionally faced the conundrum of finding a balance between maintaining growth and taming inflation.

Zhou Xiaochuan, China's central bank governor, said last November at an annual forum organized by business news group Caixin Media that China's monetary policy has multiple goals: stabilizing growth and consumer prices, ensuring full employment and balancing international payment.

The target of stabilizing prices will probably be given a more prominent position, he said.