MercoPress. South Atlantic News Agency

Inflation's political and social impact rattles Beijing

China said Wednesday it would tighten monetary policy in 2008 for the first time in a decade, as it battles to rein in a soaring stock market and an overheated economy. The shift from “prudent” to “tight” is a move analysts consider “significant”, but no major details to support the announcement were delivered.

"This comes to prove that the government is paying much attention to the two questions of inflation and the assets' prices bubble" said Zhang Ming, a Beijing-based economist with the influential Chinese Academy of Social Sciences. "This really is extremely important," Zhang underlined. The shift to "tight monetary policies" was announced after the three-day Central Economic Work Conference, a closed-door meeting of top decision-makers from the Communist Party and government, Xinhua news agency reported. The conference, the most important economic gathering of the year, also made it a priority for 2008 to prevent overheating and curb inflation. China's economy is expected to expand 11.5% this year, fuelled mainly by investment spending, according to Xinhua. It will be the fifth consecutive year of double-digit growth, and 2008 is widely expected to see yet another year of growth in excess of 10%. However growth is not seen as worrisome as inflation, which affects the personal fortunes of Chinese families, and thus could have a direct impact on public support for the Communist Party's rule. China expects increases in consumer prices to shoot to a 10-year high of 4.5 to 4.6% in 2007, fueled mainly by soaring food prices, admitted the state media last week. One of the main underlying drivers of the nerve racking growth of the Chinese economy is abundance of liquidity boosted by massive trade surpluses. The liquidity becomes a problem when banks lend money to people who use the money for speculative investments such as stocks or real estate. A default on loans could lead to a debt crisis. "China will strictly control the volume and... pace of loans, so as to better regulate domestic demand" underlined Xinhua, quoting conference sources. China's stock market has weakened in recent sessions, but the benchmark index remains up nearly 90% this year. Some of the decisions anticipated by the announcement are a new series of interest rate hikes, on top of the five that have taken place since early 2007.