China Shouldn't Relax Monetary Policy Too Fast, Official Says

By Li Yanping

Nov. 16 (Bloomberg) -- China shouldn't relax monetary policy too fast, even amid an economic slowdown, a central bank official said.

``Monetary policy shouldn't be loosened too fast because there is still a risk that inflation will rebound,'' Jiao Jinpu, vice president of the People's Bank of China's Graduate School Council, told reporters today at a financial conference in Beijing. ``The lagging effect of China's monetary policy may be more obvious while all major economies are slowing down.''

The central bank has cut benchmark interest rates three times in two months, scrapped restrictions on how much banks can lend and shifted from a ``tight'' to ``moderately loose'' monetary policy after growth expanded at the slowest pace in five years in the third quarter through September.

``Monetary policies shouldn't be adjusted too aggressively or it may have negative long-term consequences,'' said Wu Jinglian, a senior economist at the State Council Development and Research Center, at today's conference. ``Measures to bolster the economy should come more from the government's fiscal policies.''

China's under-developed financial system, volatilities in money and loan growth and turbulent global financial markets are factors that are hindering the effectiveness of the central bank's policy adjustments, Jiao said.

``As the global financial crisis is having an increasing impact on China's economy and financial system, we must constantly observe the situation and use a mix of measures flexibly and prudently to counter risks,'' said Jiao, referring to adjustments in interest rates, reserve ratios, open market operations and exchange rates.

China ratcheted up interest rates when the government was trying to stop the economy from overheating. Fan Gang, an academic adviser to the central bank, said on Nov. 14 that the government had over-tightened policies earlier, helping cause the domestic slowdown.

To contact the reporters on this story: Li Yanping in Beijing at yli16@bloomberg.net