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Grace Ng

The Straits Times

Publication Date : 14-03-2013

China must keep a close watch for inflation risks this year after price rises last month were higher than expected, its central bank chief has cautioned.

The People's Bank of China has shifted its policy stance from relaxed to neutral as it sought to "stabilise inflation expectations via monetary policies", governor Zhou Xiaochuan told a press briefing yesterday.

His comments added to signs that officials are still bent on reining in money supply and credit, particularly to the property market, even as China's economic rebound looked to have faltered recently.

Industrial production and retail sales dropped in the first two months of this year, with a spike in February's inflation growth to a 10-month high of 3.2 per cent. This adds pressure to incoming Premier Li Keqiang to calibrate policies to sustain economic growth while fighting off asset and consumer price surges.

Beijing has set a target for the M2 money supply - currency in circulation and in deposits - to grow at 13 per cent this year, a tighter policy than in previous years. This "represents a prudent monetary policy", said Zhou, stressing that "we need to keep vigilant on inflation".

So while the PBOC will step up certain measures to keep 2013 house price rises in check, in line with broader government curbs on the property market, the bank's key focus this year is still on consumer and producer price inflation, he noted.

Zhou, 65, was speaking on the sidelines of the annual session of the national Parliament.

His appointment this week as vice-chairman of China's top government advisory body allows him to serve beyond the retirement age of 65. This has fuelled expectations that his tenure as PBOC chief will be extended.

Asked about his chances of remaining in his position, Zhou said: "Up to this moment, I have no idea about this." He added: "I'm not in an appropriate position to answer that question."

But regardless of who takes this post, changes to interest rate and exchange rate regimes will remain market-oriented and policies will be stable, he noted.

The push for reforms in China's financial markets as well as its capital account and currency, which are tightly controlled, will also continue. Steps to make the yuan basically convertible will proceed in a gradual way, said Zhou, noting that "overall this is a very complicated process".

As an intermediate step, Beijing is using Hong Kong as an offshore yuan hub to experiment with reforms that support the internationalisation of the currency without having to let the yuan float freely.

Singapore and Taiwan have recently been given the green light to host offshore yuan-clearing banks. This gives the PBOC more platforms to gauge regional demand for yuan-denominated trade and investments.

Zhou said the central bank will continue to respond to the market's growing need to use the yuan. "The rising demand for yuan's broader use in trade and investment will help push forward yuan capital account reform."

PBOC vice-governor Yi Gang, who was also at the briefing, said that "market demand and competition" will determine which financial hubs will become offshore yuan centres in future.