UPDATE 2-China to gear up fight against inflation

* China c.bank sticks to prudent monetary policy stance

* Warns against inflation, asset price bubbles

* Says key task to steer money supply back to normal

(Adds analyst comment, background)

BEIJING, Dec 24 (BestGrowthStock) – China’s central bank kept up its
rhetoric against inflation and excess liquidity on Friday,
saying it will deploy a range of policy tools to head off
inflationary pressure and asset bubbles.

Hu Xiaolian, a deputy governor at the People’s Bank of
China, said monetary policy in the world’s second-largest
economy needs to be prudent to tame inflation, which hit a
28-month high of 5.1 percent in November.

“The most important task of our monetary policy next year is
to steer overall money supply back to normal,” Hu said at a
meeting with Chinese bankers.

“Bank credit expansion must be in step with main economic
targets, especially when it comes to the targets for economic
growth and inflation,” she said.

Earlier this month, Chinese leaders said fighting inflation
will be a priority for 2011 and reaffirmed a shift to a prudent
monetary policy, from the previous “appropriately loose” stance.
[ID:nTOE6BB00G]

Hu said the central bank will use a combination of policy
tools, including interest rates, reserve requirements, and open
market operations to steer policy back to normal.

“The basic tone is consistent with market expectations,”
said David Cohen, an economist at Action Economics in Singapore.
“They are part of a toolkit they have been using in a
multi-dimensional approach with the aim of constraining
liquidity and inflation.”

DIFFERENTIATED RESERVE REQUIREMENTS

Hu highlighted the importance of differentiated increases in
reserve requirements for selected banks — a tool it used twice
in the three months this year sans public announcements.

“The central bank will use differentiated reserve ratios in
a dynamic way to supplement regular monetary tools, such as
interest rates, reserve requirement ratios and open market
operations.”

The central bank has increased reserve requirements six
times so far this year in a bid to drain excess cash from the
banking system to curb inflation.

The reserve requirement ratio has reached a record high of
19 percent for some of the country’s biggest banks.

The remarks will likely reinforce market speculation that an
imminent rise in China’s interest rates or reserve requirements
is on the cards.

Many investors believe China is set to tighten policy soon
in a strike against inflation, but investors are divided over
whether the move will come before the end of the year.

Bank of Communications (3328.HK: ) (601328.SS: ), China’s
fifth-largest lender, said on Friday that it expects the central
bank to increase reserve requirements by at least 200 basis
points next year.

A Reuters poll of 19 analysts this month showed a median
forecast for the reserve requirement to hit 20 percent by the
end of 2011. [ID:nL3E6ND0QB]

The central bank’s policy stance is a vote of confidence on
the country’s strong economic growth, which Hu acknowledged.

“Overall, external demand has improved and China’s economic
growth momentum is on a solid ground. We will be able to
maintain stable and relatively fast economic growth by
implementing prudent monetary policy.”

(Reporting by Zhou Xin, Kevin Yao, Langi Chiang and Koh Gui
Qing; Editing by Benjamin Kang Lim, Ron Askew)

UPDATE 2-China to gear up fight against inflation