Cheng Siwei: China's monetary policy should not be "too loose" in 2010

"China's GDP growth rate will definitely reach 8 percent in the 4th quarter," said Cheng Siwei, former vice chairman of the Standing Committee of the National People's Congress, at a forum on humanities of Chinese scientists. He also suggested that China should pay close attention to the inflation expectations that come with credit expansion and monetary policy should not be "too loose" in 2010.

Cheng noted that in the first quarter of 2009, when China witnessed lowest GDP growth rate of 6.1 percent, consumption contributed 4.3 percentage points to economic growth. "Consumption played the leading role at that time."

China started to bottom out in the second quarter, Cheng said. In the first three quarters, China's economy expanded by 7.7 percent, in which investment contributed 7.3 percentage points. Consumption's contribution was only 4 percentage points while foreign trade had an impact of negative 3 percentage points. "Investment was starting."

Cheng is confident about China's economy. He believed that the GDP growth rate would definitely reach 8 percent in the forth quarter. "We are not only looking forward to an 8 percent growth rate, but also sustainable growth."

When asked about China's action in 2010, Cheng noted that monetary policy should not be "too loose".

In the first quarter, new yuan-dominated bank loans totaled 4.58 trillion yuan. The figure grew to 7.37 trillion yuan by the end of the second quarter and 8.9 trillion yuan by the end of the third quarter. In fact, credit expansion had already slowed down in the third quarter. "If this year's total new loans are kept below 10 trillion yuan, it will be easier to arrange our work in 2010, or we will be affected."

Cheng also mentioned a related problem, adding that "we should pay close attention to inflation in 2010."

The negative year-on-year CPI growth rate in the first three quarters was partly the result of the high inflation rate in 2008, said Cheng. Meanwhile, growth of money supply will take about one year to drive consumer prices, he said.

He pointed out that with the development of virtual economy, growth of money supply may flow to the stock market and the real estate market rather than real economy. "Stock market and real estate market can absorb money supply growth and prevent a price hike of consumer products, and this is what happened in 2007."

"Once asset prices plunge, inflation will come out right away," Cheng warned. "However, we don't have to be over anxious as long as our income growth rate is higher than inflation rate."