China’s ‘Hawkish’ Central Bank May Tighten Even as Economic Growth Cools

China’s central bank said taming inflation is its top priority, signaling that more tightening is possible even after a manufacturing survey showed that growth may be moderating in Asia’s biggest economy.

“Stabilizing prices and managing inflation expectations are critical,” the People’s Bank of China said in a first- quarter monetary policy report published yesterday. Bank reserve requirements have no “absolute ceiling,” the report said, restating Governor Zhou Xiaochuan’s comment on April 16.

The Shanghai Composite Index fell 2.1 percent as of 2:35 p.m. local time, set for the biggest decline in two months, on concern that tightening will cut profits and growth. The central bank may boost lenders’ reserve requirements this month, the China Securities Journal said on its front page today. Separately, the Shanghai Securities News said officials may expand controls on the property market to more cities.

“The PBOC kept a fairly hawkish tone toward inflation,” said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. Officials will add to tightening, managing the “pace and intensity” of measures more carefully and perhaps relying more on gains in the yuan, he said.

A manufacturing index slid in April from March after increases in bank reserve requirements and interest rates and faster gains in the yuan.

The central bank has raised lending and deposit rates four times since mid-October. The yuan has strengthened above 6.5 per dollar for the first time since 1993, and reserve requirements for the biggest banks stand at a record 20.5 percent excluding any extra limits for individual lenders not publicly announced.
Faster Inflation

Premier Wen Jiabao’s government aims to cool the fastest inflation since 2008 and rein in property prices without undermining the expansion.

Consumer prices may rise at a slower pace in the second half, the Securities Journal reported today, citing Yi Gang, a deputy governor at the central bank.

Economic growth and employment are at “reasonable” levels, the central bank said in yesterday’s report. Officials will increase exchange-rate flexibility, control liquidity in the financial system, and use interest rates to manage inflation expectations, it said.

Inflation was an annual 5.4 percent in March, exceeding the government’s full-year target of 4 percent for a third month. Unilever, the world’s second-largest consumer-goods maker, said March 31 that it was among companies to have postponed price increases at the government’s request.
Commodity Costs

“Given the loose monetary policies of major economies and gradual recovery of the global economy, commodity prices keep climbing and global inflation expectations are rising significantly,” the People’s Bank of China said. “China is seeing increasing pressure from imported inflation.”

Zhang Liqun, a senior researcher at the State Council’s Development Research Center, said May 1 that the manufacturing data showed an increased likelihood that growth will slow. China’s gross domestic product expanded 9.7 percent in the first quarter from a year earlier and the World Bank last week forecast a full-year expansion of 9.3 percent.

U.S. Treasury Secretary Timothy F. Geithner said yesterday that it will help global economies if China allows its “substantially undervalued” currency to strengthen.

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net