Finance & Business World

China’s central bank may be forced to tighten its “loose” monetary policy in the second quarter of 2010 when inflation is expected to reach 4 percent, according to Citigroup Inc.

“China worries about inflation more than asset market bubbles,” Shen Minggao, Citigroup’s chief economist for the Greater China region, said in an interview in Hong Kong yesterday. Rising prices may spook low-to-medium income groups and threaten social stability, he added.

The People’s Bank of China may issue bills to soak up cash or raise its capital reserve ratio when inflation exceeds the government’s 4 percent target, Shen said. Consumer prices in Asia’s second-largest economy, which declined for a sixth straight month in July, may start to increase again in the fourth quarter, he said.

In 2008, the Chinese central bank slashed interest rates and reserve requirements to help shield the economy from the global recession business card. Premier Wen Jiabao also unveiled a 4 trillion yuan ($585 billion) stimulus package to buoy growth.

China’s top economic planning agency, the National Development and Reform Commission, on Aug. 27 denied the country faces a sharp and sustained increase in prices. The agency called on local governments to “strengthen price monitoring” on consumer goods.

Consumer prices in China plunged 1.8 percent in July from a year earlier, the biggest decline since 1999. The key one-year lending rate is 5.31 percent and the nation’s biggest banks are required to set aside 15.5 percent of their deposits as reserves.

Citigroup’s Shen expected consumer prices to rise 3.2 percent next year. The median estimate of 16 economists surveyed by Bloomberg News is for a 2.7 percent increase in 2010.

Source