September 8, 2011 / 4:43 PM / 7 years ago

China monetary tightening should continue: IMF

NEW YORK (Reuters) - China should keep tightening monetary policy to fight inflation pressures even as the pace of global growth shows signs of faltering, the International Monetary Fund’s China mission chief said on Thursday.

“We still see growth as pretty healthy in China. We think the target they have for monetary growth this year is around 16 percent growth in M2, a pretty good level of monetary growth given the pace of growth in the economy,” the IMF’s Nigel Chalk, a senior advisor for Asia and the Pacific, told Reuters after a speech at the Asia Society in New York.

Europe’s debt crisis and the slowing of the U.S. economy to the point where the risk of another recession has increased have raised expectations that China may delay its next tightening step or forgo an interest rate rise this year.

“The planned tightening that they have during this year looks about right to us,” Chalk said.

Achieving policy goals would be more effective through greater use of interest rates rather than quantitative tools, he said.

Inflation in China reached a three-year high of 6.5 percent in July. Beijing has raised rates five times and banks’ required reserve ratio nine times since late 2010 to manage inflation.

The People’s Bank of China ordered banks to include margin deposits as part of required reserves set aside at the central bank to rein in excess liquidity.

China’s economic growth, enviable at a revised 10.4 percent for 2010, is expected to slow to 9.6 percent in 2011, according to a June IMF forecast. However, that forecast is likely to change when new data are released ahead of the annual meetings of the IMF and World Bank in Washington on September 23-25.

Chalk declined to comment on the forecasts or for a level on China’s yuan, which he said was appreciating too slowly against a broad basket of its trading partner’s currencies.

“The pace of reserve accumulation is growing faster. We are seeing trade surplus starting to come back, exports quite strong, so if you really want to have the economic effects from a strong renminbi, you really have to see it appreciating as basket of trading partners, and that has been relatively slow.”

The focus remains on the level with the U.S. dollar. On Thursday spot renminbi, also referred to as yuan, closed at 6.3840 versus the greenback, up 3.22 percent year-to-date and 6.92 percent since its depegging in June 2010.

Chalk did not put much weight behind the internationalization of the renminbi as a result of central bank buying, referring to Nigeria’s decision to start holding China’s currency in reserve.

“I don’t think it is going to be a key process in the internationalization of the renminbi. Much more it is going to be driven by trade and development of financial instruments offshore denominated in renminbi,” he said.


Over the next 18 months China will undergo a leadership transition that is likely to see disruptions, albeit small, to at least its economic and financial reform plans, Chalk said.

“Financial regulation they have been improving, consistently. The underlying liberalization of the financial system and moving toward a market economy, for example liberalization of interest rates, I wouldn’t expect that is something you will see in the next one to two years, but over the course of the five years, I think you’ll see it,” he said.

Shifting the economy’s focus away from exports and toward domestic consumption has been a key focus and will remain so, Chalk said.

The question is whether Beijing is moving fast enough in this direction and will they get the sequence of reforms down correctly.

“It is hard to tell. The problem is the economy is growing at 10 percent in real terms. It is not so much that consumption has to be faster, the problem is it has to be faster than GDP,” Chalk said.

“Although retail sales consumption through this year has help up pretty well, when we look at the data from last year you still saw consumption declining as a share of output. That is a kind of trajectory that needs to be reversed.”

Editing by James Dalgleish

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