China's central bank will maintain its cautious stance on further monetary policy moves to ensure that the nation's fast-growing economy enjoys a "soft landing," a leading official said.

People's Bank of China Vice-Governor Guo Shuqing said that macroeconomic measures already taken have "had quite some effect," meaning that further action, such as an interest rate rise, "should be considered prudently."

"We need some further observation," Guo told a seminar organized by the State Council's Development Research Center (DRC) on Saturday.

"But the central bank will remain especially vigilant about price increases," pledged Guo, whose remarks came as speculation ran high about a possible rate increase.

This comes as the nation's consumer price index (CPI), the key barometer for inflation, topped 5 percent last month.

Central bankers had earlier said that the bank would not turn a blind eye when the CPI reached the 5-6 percent range.

The index emerged from negative territory only last year, following months of deflationary pressure. But it increased rapidly in recent months, prompting inflationary concerns at a time of sizzling investment and credit growth.

China's fixed investment and loans kept soaring since the middle of last year, pushing up industrial prices and stretching supplies of energy and transportation capacity.

But this frenzied growth eased off significantly in June, something which was cheered by many as a sign that the State's tightening measures are having an impact.

The government has taken both monetary policy moves, mainly three increases in bank reserve requirements, and administrative measures such as price curbs and strict land policies to reduce fixed investment and credit growth.

But the economy is still sending only mixed signals about the future direction of macroeconomic policy.

"Monetary performance has seen obvious changes," Guo said, citing the fall last month in money supply and new loans growth, as well as stabilizing interest rates on the money market.

But liquidity remains loose in the banking system, with commercial banks' excess reserves, which they set aside for payment needs, standing at 3.75 percent of their total deposits at the end of last month, he said. That was higher than the level in September last year, when the central bank announced the first of the three increases in required reserves aimed at restricting banks' lending capacities.

"It (excess bank reserve levels) can only be higher today," Guo said.

What is more important, the official noted, is the possibility of fixed investment and credit growth re-accelerating "in new forms" once administrative controls are relaxed.

Guo's concern was shared by Yao Jingyuan, chief economist of the National Bureau of Statistics (NBS). "What is unique about administrative measures is that they yield instant results, but the results tend not to last long," he told the seminar.

And businesses may soon be requesting more loans from banks to fund their expansion, using the excuse of alleviating a working capital shortage, Guo said.

Analysts said the government-ordered slowdown in new loans in June was mainly due to fewer short-term working capital loans, constraining liquidity at many small and medium-sized enterprises.

Economists are still divided over the prospects for inflation in the coming months and the necessity of an immediate rate increase.

Zhang Zhuoyuan, a senior economist at the Chinese Academy of Social Sciences, predicted full-year CPI growth would be in the 4-5 percent range, and a rate rise would be "hardly avoidable."

"Prices are climbing, with the growth rate higher than the one-year deposit rate. Price increases for raw material and industrial goods have also surpassed the one-year lending rate," he said. "That has clearly created a negative real interest rate environment, which makes an interest rate rise inevitable."

Some seminar participants ruled out the possibility of rampant inflation, insisting the current price level remains manageable.

"Our basic judgment is that current inflationary pressures are acceptable and controllable," said Zhang Junkuo, director of the Market Economy Research Institute under the DRC.

China's CPI rose by 3.6 percent in the first half of this year, but the increases were 80 percent driven by rises in grain and food prices, the NBS said. That means the increase in core CPI has been "insignificant," Zhang said.

Although CPI growth is likely to keep above 5 percent for the third quarter, it is expected to subside significantly in the fourth quarter due to the high price base a year earlier and anticipated increases in grain output.

"For the entire year, 4 percent should be achievable," Zhang said.

(China Daily July 26, 2004)