Chinese inflation is still too high and the country needs to maintain its prudent monetary policy, China's bank said today.
"Some factors driving up prices have been controlled to an extent, but they have not been fundamentally eliminated," the People's Bank of China said.
The statement, published on its website, followed the release on Friday of Chinese annual consumer inflation, which eased to 6.2 per cent in August from July's three-year high of 6.5 per cent.
"Inflation is still too high, and stabilising overall price levels remains the top priority of macro-economic policy," the central bank said.
It reaffirmed that China would "stick to prudent monetary policy and maintain appropriate money and credit growth".
However, the central bank has refrained from any substantial monetary tightening since early July. It last raised interest rates on July 6 and raised bank required reserves on June 14.
Some economists said Beijing would probably have to relax its policy sooner or later as the worsening European sovereign debt crisis and a possible recession in the United States would reduce demand for Chinese goods.
They said Chinese consumer inflation may have peaked in July and would ease in the next few months.
Stubbornly high inflation is partly a result of the very loose monetary policy China adopted during the global financial crisis.
The central bank has raised bank reserve requirements nine times and increased interest rates five times since last October to mop up excess cash.
The PBOC has also used other tools at its disposal, including open market operations, reserve requirement rises for a select group of banks and a widening of the base for calculating deposits in order to lock up more money, crimping banks' ability to lend.
As a result, central bank data showed yesterday that the broad measure of M2 money supply slowed to 13.5 per cent in August, the lowest since October 2004.
However, the PBOC was quick to add that "although M2 growth looks a bit lower than it has in the past, actual monetary conditions match China's stable and fast economic growth."
The reason was that Chinese banks had taken their money supply off balance sheets via so-called wealth management products, the central bank said in the statement.
Meanwhile, alternative funding sources, including bonds and stocks, were also supporting real economic growth, it said, adding that bank lending accounted for only 56 per cent of aggregate social financing to the economy.
"The overall liquidity level is appropriate," the central bank concluded.
Reuters