To address market concerns about the outlook for China's economy, Li Yang, vice-president of the Chinese Academy of Social Sciences and a renowned financial expert, has given an exclusive interview in which he explained some major policies and assessed what is likely to be ahead.

Reporter: On January 18, the People's Bank of China (PBoC) increased the reserve requirement ratio (RRR) of deposit-taking financial institutions by 50 basis points. Only one month later, the PBoC announced an additional upward revision of the reserve requirement ratio by 50 basis points after February 25. Does it signify a change in loose monetary policy?

Li Yang: The hikes in the reserve requirement ratio by the PBoC are made in accordance with changes in economic conditions.

Gross domestic product growth on the mainland jumped more than 9 percent in the fourth quarter of last year, while the growth continues to accelerate now. There are several data that have prompted the monetary authority to implement corresponding actions.

First is loan growth. Loan growth on the mainland has already reached 600 to 700 billion yuan in just a week, despite the 7.5 trillion yuan target for the entire year.

Second is export figures, which have been surging very rapidly. Third is the soaring consumer price index. In order to tackle these changes, the PBoC immediately adjusted upward the reserve requirement ratio.

The overall monetary policy will not change much. However, some adjustments, especially in monetary policy, will be made, according to developments in the overall situation.

Reporter: Governor of the PBoC Zhou Xiaochuan said inflation has already appeared on the mainland. What is your comment on the country's inflation issue?

Li Yang: Talking about inflation, I think it has now started to appear on the mainland. However, the inflation pressure in general is not very significant, while the current inflation situation is quite different from the past.

The country's inflation will be affected by both positive and negative factors in 2010 and 2011, which means both inflationary and deflationary factors will exist.

Several factors are currently affecting the country's inflation, among them, credit expansion. Some industries in the country, meanwhile, are facing bottlenecks, especially the agricultural sector. Problems with agricultural products usually have crucial impacts on the country's consumer prices.

On the other hand, hikes in consumer prices and costs of environmental resources are also accelerating inflation.

However, the country also has several deflationary factors. For instance, our overall demand is lagging behind, and there is overcapacity in dozens of industries.

Reporter: Last year, as credit policy was crucial to maintain economic growth, bank lending erupted on the mainland, which, according to statistics, increased almost 10 trillion yuan throughout the year. Therefore, how do we reduce credit risk? Will there be an interest hike in the short-term?

Li Yang: Credit risk is one of the biggest side effects brought about by the bumper credit supply in 2009. In this sense, increasing the ratio of reserve requirements is also aimed at improving our risk prevention capability.

Excessive lending now is under clear control. Administrative means have been strengthened, as the market seems unable to effectively deal with economic overheating on its own.

With regard to interest rates, I believe a hike at this moment will be beneficial, as it will barely have an effect on the Chinese economy, and I also don't think it is so overheated that an interest rate hike is needed. Moreover, an interest rate increase will affect exchange rates accordingly.

If the interest rate goes up, it will only impose greater pressure to cause the RMB to appreciate. Although there are uncertainties, they are still not serious enough to increase the interest rate right now. Hence. I don't think the interest rate hike is necessary, taking into account the overall picture.

This is an edited and translated version of an article published in the March issue of Bauhinia Magazine. Translation by Joey Kwok.

(HK Edition 03/03/2010 page3)