China concluded its three-day 2007 Central Economic Work Conference on Wednesday with a pledge to shift its monetary policy from "prudent," an approach it has followed for the last ten years, to "tight."
The conference, an annual event initiated more than a decade ago, serves as a crucial mechanism for the Communist Party of China (CPC) Central Committee and the State Council, the cabinet, to make policies to govern the Chinese economy.
China will maintain a "prudent" fiscal policy for the coming year.
Various monetary instruments should be used to regulate liquidity and to strictly control the size of loans and frequency of credit extension, so as to better regulate domestic demand and balance international payments, said the conference.
China raised interest rates five times and reserve requirement ratio nine times this year.
The conference said that with a prudent fiscal policy and a tight monetary policy, China will be able to achieve "the Two Prevents" in the coming year: to prevent economic growth developing from rapid to overheating, and to prevent price rises evolving from structural to evident inflation.
"A tight monetary policy can develop a progressive effect, which will help curb the overheating in markets of assets, including equities and real estate, and then cap price rises," Cao Honghui, an economic researcher with the Chinese Academy of Social Sciences (CASS), said to Xinhua.
China has been implementing a prudent monetary policy since 1997. From 1998 to 2002, the country increased money supply to counter deflationary pressure.
From 2003 to 2007, the monetary policy began to tighten in order to help address changes in economic development, including rapid growth in credit extension, investment and foreign exchange reserves.
"The new policy reflects the accurate judgment by the central government on China's current economic situation, which is under pressure from further price rises and unduly fast loan growth," Peng Xingyun, a senior researcher with the Research Institute of Finance under the Chinese Academy of Social Sciences, told Xinhua.
The country's consumer price index (CPI) rose a decade-high 6.5 percent in October, well above the government-set alarm level of three percent. Observers here said the major inflation indicator will most likely rise to a new high in November.