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Central bank confident on economic objectives

China's central bank dismissed fears yesterday that the nation's economy is heading towards an abrupt slowdown, maintaining its full-year forecasts for major economic indicators.

The People's Bank of China also stressed in its first-quarter monetary policy report released yesterday that its monetary targets - 17 percent for money supply growth and 2.6 trillion yuan (US$313 billion) for new loans - are still "basically achievable.'

"Although the 2.6 trillion yuan level of new loans is lower than last year, it is still the second highest in history, [this] will not lead to a 'hard-landing'," said a bank spokesperson.

The report predicted China's gross domestic product (GDP), consumer price index (CPI) and new loans will all remain in the fast lane for the second quarter of the year, but will slow down in the third quarter as the impact of recent policy initiatives starts to be felt.

The report came amid growing concerns that China may resort to drastic tightening measures, such as an interest rate rise, to cool down an investment frenzy and rapid loan growth, and soothe growing inflationary pressures.

Such concerns were fuelled particularly by a China Banking Regulatory Commission circular at the end of last month requiring banks to tighten lending, leading to a broad fall in the stock market.

"The report will presumably play a stabilizing role," said Wang Yuanhong, a senior analyst with the State Information Centre, an influential think-tank.

"It suggests, at least, that there will no more major monetary action before the end of June," he said. "And it demonstrates the central bank's confidence that economic growth will not suffer abrupt fluctuations."

Rumours abounded last month of an imminent interest rate rise, as increasing numbers of economists who are sceptical about the effect of the central bank's recent tightening measures are calling for stronger measures to rein in the nation's breakneck investment growth.

Fuelled by faster-than-expected loan growth, China's fixed investment soared by 43 per cent on a year-on-year basis in the first quarter of this year, close to levels seen in the overheated early 1990s, while CPI rose by 2.8 per cent as compared to months of negative growth in much of last year.

Central bankers have stressed they would wait to see if monetary actions - mainly the two increases in bank reserve requirements that took effect late last month - could work as expected before they take further steps.

The central bank said the growth of GDP, CPI and loans in the second quarter, was largely due to the SARS related slowdown and the lag effect of monetary policy moves, was "well anticipated". But it acknowledged that investment is showing signs of overheating in some areas and pledged to contain the trend.

Over investment has aggravated coal, electricity and oil shortages, hampered the structural optimization of the economy and heightened inflationary pressures, it said.