BEIJING (Reuters) - Chinese policy makers will have a tough time in 2008 battling inflation, excess liquidity and rapid investment, Vice Finance Minister Li Yong said on Sunday.
China has taken a series of measures such as cutting export tax rebates and tightening investment criteria to cool an economy that expanded 11.5 percent in the first nine months of 2007 compared with a year earlier.
The central bank also raised interest rates six times last year and ordered banks on 10 occasions to set aside more deposits in reserve.
"Although these policies are working well, there is still a shortfall from the desired and expected effects," Li told a forum.
Consumer prices rose 6.9 percent in the year to November, the fastest pace in a decade, setting alarm bells ringing in the halls of power.
Chen Jiagui, vice head of the Chinese Academy of Social Sciences, said the State Council, or cabinet, held an emergency price meeting last Friday and would hold another one on Monday.
The State Council said after yet another conclave devoted to inflation last Wednesday that it would keep a freeze on energy prices and would temporarily intervene directly in the market to hold down prices of daily necessities.
With climbing global grain and raw material prices adding to domestic price pressures, China's year-average inflation could be as high as 4.6 percent in 2008, Xu Lin, a senior official from the National Development and Reform Commission, said on the sidelines of the forum.
That would match the rate for the first 11 months of 2007.
HANDS TIED
Li said inflationary pressure was still mounting, but China now had less room for maneuver even though it shifted its monetary stance in early December to "tight" from "prudent."
Banks' reserve requirements were already at a historical high of 14.5 percent, while it was difficult to raise interest rates further given that rates are falling in countries such as the United States, Li said.
Even without an attractive interest rate differential, the U.S. credit crisis could trigger unwanted speculative capital flows into China, especially at a time when global investors view emerging markets as a relatively safe haven, he said.
Li said China's trade surplus, which rose 48 percent last year to a record $262.2 billion, was likely to remain elevated in the first half of 2008, adding to liquidity in the banking system.
With the yuan also on an appreciating track, the problem of excess liquidity was unlikely to fundamentally ease any time soon, the official warned.
Li said the impetus behind fixed-asset investment remained strong as the large number of projects launched in 2007 would require continued capital spending this year.
Closer coordination of fiscal and monetary policy was needed to tackle the array of problems, Li said.
The Finance Ministry is considering issuing more types of treasury bonds so that the central bank has a broader range of paper with which it can conduct open market operations, Li said.
Speaking at the same forum, newly promoted deputy central bank governor Yi Gang said the People's Bank of China would fight inflation by further tightening monetary policy, but it would do so cautiously to ensure stable economic growth.
"We will unwaveringly fight against inflation and implement a tightening policy. But we will make sound arrangements to ensure fairly stable economic growth," Yi told reporters.
Chinese property and share prices, though very high in some cases, were close to their equilibrium levels, he added.
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