China to tighten its monetary policy next year

China will tighten monetary policy next year, the country’s Communist Party leadership said Friday, signaling the world’s second-largest economy will likely slow down in the coming months to combat inflation and settle into a more sustainable pace of growth.

The announcement by the nine-member Politburo, which was made through the state New China News Agency, said China would shift to a “prudent” monetary policy from a “moderately loose” approach. The decision comes after two years of unprecedented bank lending has flooded the economy with excess liquidity.

Easy credit is being blamed for real estate prices that have doubled and tripled in some of China’s leading cities in recent years. Led by soaring food prices, the country’s inflation rate hit a 25-month high in October and is expected to have risen even more in November.

China’s leaders have already taken steps to cool the country’s economy, which grew by 9.6% in the third quarter from a year earlier. At a time when the United States and Europe are struggling to stimulate growth, China has been reigning in its property market, raising the amount of money its banks must hold in reserve and increased the central bank’s benchmark interest rate in October for the first time in nearly three years. Analysts believe China will raise interest rates again soon.


“‘Prudent’ has been the word of choice by Chinese officials for a month or so now when describing the desired stance of monetary policy, but its use in today’s statement by the Politburo is a more authoritative signal of a shift,” wrote Brian Jackson, an economist for the Royal Bank of Canada, in a note to clients Friday.

The Politburo’s statement also noted the need to boost domestic consumption, promote imports and tackle climate change.

China’s benchmark Shanghai Composite Index reacted cautiously to word of monetary tightening Friday, dropping 0.04%, or 1.18 points, to 2,842.43.