China's freedom to deliver its declared monetary tightening is constricted by the risk of a tide of cash rushing into the country, the central bank said on Wednesday. But the People's Bank of China, in its first-quarter policy report, said it would still stick to its tightening stance to ward off price pressures as inflation remains stubbornly high.
"Capital inflows to our country will probably rise further in the short term, which will increase the difficulty of implementing a tight monetary policy," the central bank said.
It said its hands were tied by the gap between Chinese and US interest rates as well as turbulent global financial markets, which have made China's robust growth even more attractive to foreign investors. China announced a shift to monetary tightening in December in order to tackle inflation but it has not raised interest rates for nearly five months.
Stephen Green, China economist at Standard Chartered, said the caution on rates was misguided. "Money is going into China if they add another 100 bps to interest rates or not," he wrote to clients. "But (the central bank) seems not to buy that view."
Some market players have said the government was quietly easing policy in the face of a global slowdown and sharp domestic challenges, from a harsh winter that paralysed much of the country's south to the earthquake that devastated parts of south-western Sichuan province this week.
The central bank, though, was bullish about the country's resilience. Annual gross domestic product slowed to 10.6 percent in the first quarter from 11.2 percent in the final three months of 2007. "The overall economic performance was better than our expectations," it said, while adding that it thought first-half growth would slow further. The report also sounded an optimistic note about inflation, which is running near a 12-year high at 8.5 percent.
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