(CRI English)
Updated: 2008-01-02 17:37

China, as expected, maintained double-digit growth for the fifth consecutive year in 2007. But experts say this does not necessarily mean the Chinese economy has been free from disturbances. As the country has pledged to proceed with a tightening monetary policy in 2008, it's believed that active initiatives are being undertaken to tackle the excess liquidity.

In the first three quarters of 2007, China's economy, the world's fourth largest, grew 11.5 percent.

While such a rapid growth rate does generate excitement, He Jun, a senior analyst with Anbound Consulting Group, says worries still exist.

"The country has maintained a strong momentum in economic growth, but it's also facing increasing pressure from inflation and the structural adjustment of its economy."

In the past year, "excess liquidity" has been among the most popular economic terms.

Affected by imbalance in the world economy, China has been bothered by a mounting trade surplus that resulted in huge foreign exchange reserves and the banking system's credit initiative.

"Excess liquidity has led to the occurrence of inflation."

The country's consumer price index, or CPI, an indicator of inflation, rose by 6.9 percent in November, far above the central bank's target of 3 percent. The rate is the highest in 11 years.

In the past year, the country's central bank, the People's Bank of China, raised interest rates six times and the reserve requirement ratio ten times.

Let's hear from professor Zhou Chunsheng with Cheung Kong Graduate School of Business.

"Central bank would like to tighten monetary policy to reduce liquidity in the market. Of course, it's not an easy task under the current condition in China. We have huge foreign exchange reserve. We have huge trade surplus. And a lot of money is pouring into China."

According to He Jun with the Anbound Consulting Group, the moves might temporarily ease the problem, but they won't end China's negative real interest rates.

The analyst says he believes the key to solving excess liquidity lies in obtaining a balance between foreign earnings and payments.

"This requires a reasonable growth of the Chinese currency, the yuan. It also calls for the expansion of domestic demand and maturity of the financial system."

Earlier in December, the central bank announced that it will proceed with a tightening monetary policy in 2008, a step up from the "moderate tightening" of the past few years.

He Jun says this demonstrates the efforts by the central government to achieve "the Two Prevents".

"That is to prevent economic growth developing from rapid to overheating, and to prevent price rises evolving from structural to evident inflation."

It has been reported that to better regulate domestic demand and balance international payments, various monetary instruments, such as interest rate hikes, will be used to regulate liquidity and to strictly control the size of loans and frequency of credit extensions.