International | Oct 02 2007
By Chris Shaw
According to Morgan Stanley chief economist for Greater China Qing Wang, policy makers at the People Bank of China (PBoC) have turned more hawkish than has previously been the case.
Wang suggests the policy shift has been indicated by the language used in a statement issued by the PBoC’s Monetary Policy Committee after its third quarter meeting last week, at which it was suggested further close monitoring of economic conditions was needed along with an allowance for market supply and demand to play a greater role in terms of setting the country’s exchange rate.
He also points out the previous time such a tougher rhetoric came out was after the first quarter meeting earlier this year, when comments regarding the need for stronger coordination between interest rate and exchange rate policies were quickly followed by a hike in official interest rates and a widening of the currency’s trading band against the US dollar.
As a result Wang expects further increases in interest rates and a faster rate of appreciation of the currency between now and the end of the year, along with a further tightening in credit conditions.
He suggests this tightening is likely to take the form of moves to slow the rate of bank credit expansion, likely by means of tougher guidelines for the state-owned banks. This should flow through into falls in both money supply and credit growth rates, Wang forecasting the former to slow to 17% by the end of the year from 18% now and the latter to 16% from 17% currently.
While there will be some tightening Wang doesn’t expect any heavy-handed measures to be introduced in the short-term at least and especially prior to the Communist Party Congress Meeting later this month, a meeting that occurs only once every five months.
The fact the global sub-prime credit issue has yet to fully play out also makes any significant new measures unlikely, but the weakness in the US dollar resulting from the Federal Reserve’s decision to cut official interest rates has Wang forecasting the renminbi will reach 7.3 against the greenback by the end of the year from around 7.5 now.
