China says it will tighten monetary policy in 2011

By JOE McDONALD
The Associated Press
Friday, December 3, 2010; 7:34 AM

BEIJING -- China's leadership ordered a shift from easy credit to a "prudent monetary policy" on Friday as Beijing steps up its fight against inflation and tries to guide rapid growth to a sustainable level.

The announcement reinforces a change in direction charted this year of modest tightening after the government and banks flooded the economy with easy money to effectively ward off the global economic crisis in 2009.

The ruling Communist Party's top body, the Politburo, decided to "implement an active fiscal policy and a prudent monetary policy" in 2011, said a Cabinet statement.

Beijing raised interest rates Oct. 19, highlighting its divergence from the United States and other major economies, which are trying to boost growth. The central bank said in its latest quarterly report it would "gradually return policy to a normal position," indicating interest rates would rise.

The government is trying to cool inflation that spiked to 4.4 percent in October - well above the official 3 percent target - driven by a 10.1 percent jump in food costs. Analysts say November inflation might rise still higher.

"Growth seems pretty solid and inflation is higher than expected," said Tom Orlik, an analyst in Beijing for Stone & McCarthy Research Associates. "Put that together and it makes sense to shift policy position."

Analysts expect more rate hikes in coming months. Chinese stocks have fallen amid investor concern that might slow growth or choke off credit that is helping to support stock prices.