China’s faces risks from rapid credit growth, high investment – IMF chief
AFX News posted by FORBES.com
BEIJING (XFN-ASIA) – China’s reliance on credit and investment to fuel economic growth runs the risk of pushing up inflation and creating more non-performing loans in the banking system, International Monetary Fund managing director Rodrigo de Rato said.
‘Rapid growth of credit and high levels of investment are a risk for the Chinese economy and could materialize to inflation but also ineffective investment,’ he said at a press conference in Beijing.
The IMF official said the need to sterilize large inflows of capital are limiting the use of monetary policy in China.
‘If monetary policy has to take a heavy tool in sterilizing large inflows into the economy, the capacity to use monetary policy to do other things diminishes,’ he said.
And he said the IMF thinks monetary policy, effectively used, would be better than the administrative measures now used by authorities to limit investment and credit growth.
‘We think administrative measures, window policies, are not appropriate measures to limit or reduce the strength of investment.’
Greater flexibility in its foreign exchange policy would give China more choices when it comes to monetary policy, de Rato said.
‘A more flexible exchange rate would allow for the fuller play of monetary policy. The need for monetary policy to play a more important role, we see that as key,’ he said.
De Rato said the success of China’s currency policy should not be judged solely against the dollar but against the currencies of all its trading partners.
‘The effective exchange rate is a key question to judge what is the appropriate path’ of the yuan.
De Rato added that the IMF does not see any need to panic over the current state of inflation in China.
‘We don’t see a short-term risk of inflation. We don’t see inflationary pressure this year,’ he said.
CPI growth jumped to 2.8 pct in December from November’s 1.9 pct but food prices make up a third of the basket used to measure CPI and analysts have pointed out that surging grain prices played a major part in the CPI growth.
