A month ago, after China's annual Economic Work Conference, policymakers officially espoused a continuation of “moderately loose” monetary policy into 2010. At the time, that approach seemed incongruous, given that price indices, while still low in absolute terms, had been racing upward on a month-on-month basis. Now, in view of Thursday's economic data dump, it seems downright irresponsible.
China is the only large economy in the world showing double-digit gross domestic product growth. Consumer price inflation approached 2 per cent in December, from 0.6 per cent a month earlier. Food prices, accounting for nearly a third of that CPI basket, are increasing at more than 5 per cent. Year-on-year industrial production and retail sales were both up by nearly a fifth in December. Data earlier this month showed house prices continuing to spiral upwards, and there has been a return to strong, positive export growth. The economy, in short, has more than a whiff of exuberance. Yet it was only earlier this week that the People's Bank carried out its first unequivocal act of tightening since June 2008, raising banks' reserve requirements by 50 basis points.
The last round of tightening was a leisurely affair, beginning in August 2003 with 100bps on the RRR, followed by another 50bps eight months later. This time round, the tools should be deployed with more urgency. CPI is on a steeper trajectory than even in the summer of 2007, while the national property price index, ticking up at a monthly rate of about 0.5 per cent in the mid-2000s, is now inflating about three times as quickly.