The central bank vowed yesterday to provide ample liquidity to financial institutions if necessary to ensure stable economic growth, but warned that an injection of liquidity may lead to high inflation in the future.

The authorities would "ensure the financial system has sufficient liquidity and provide liquidity support for financial institutions in a timely manner", the People's Bank of China said yesterday in its monetary policy report for the third quarter.

China's annual economic growth slowed to 9 percent in the third quarter, down from 11.9 percent last year, due to reduced demand from the sagging world economy. The nation has launched a 4 trillion yuan stimulus package to prevent it from sliding further down.

The central bank said the amount of current money supply was appropriate, but will adopt a "properly relaxed" stance - which has been interpreted as an equal to an expansionary policy - to stimulate economic growth.

It will take a number of measures, including a reduction in issue of bills and strengthened "moral suasion" to ensure banks lend to businesses that need capital, the report said.

In the long run, however, China still faces the challenge of high inflation after its economy stabilizes, since the world economies, including China, are all injecting liquidity into the financial system, which will lead to a liquidity boom in the coming years, the report warned.

"In the short term, the monetary policy should (aim to) prevent deflation, but it should target inflation in the longer term," it said.

Central Bank Vice-Governor Yi Gang also recently said the country would take "forceful" measures to prevent spreading of pessimistic investor mood and ensure liquidity in the banking system.

(China Daily November 18, 2008)