China Slows as Central Bank Policies eventually bite

The Chinese central bank's attempt to slow the economy and put the brakes on inflation appear to be working (finally).

However, China is far from out of the woods yet (and we must also question whether China really wants to get out of the said woods).

China's trade surplus once again hit a new record last week and China's foreign exchange surplus reached another record at $1.53 trillion at the end of 2007.

China Money Supply Growth Slows as Central Bank Measures Bite [Bloomberg]

Jan. 11 (Bloomberg) -- China's money-supply grew at the slowest pace in seven months, evidence that central bank measures to cool inflation and prevent the economy from overheating are beginning to work.

M2, the broadest measure of money supply, rose 16.7 percent to 40.3 trillion yuan ($5.55 trillion) from a year earlier, the central bank said today on its Web site. The pace slowed from November's 18.5 percent and compared with the 18.2 percent median estimate of 20 economists surveyed by Bloomberg News.

The central bank has been trying to stem the flood of money into the economy from a record trade surplus to slow the fastest inflation in 11 years and curb investment. The bank is likely to take more measures to limit credit because money supply growth is still more than the 16 percent target set for last year.

``Money supply and loan growth will continue to slow through the first half of 2008 as the central bank forcefully implements curbing measures,'' said Sun Mingchun, an economist at Lehman Brothers Holdings Inc. in Hong Kong.

China's foreign-exchange reserves, the world's biggest, rose 43 percent to a record $1.53 trillion at the end of 2007 from a year earlier, today's central bank statistics showed.

As well as six interest rate increases last year, the central bank has raised the amount of money banks must set aside as reserves to a 20-year high and directed banks to limit lending.

``The central bank's tightened monetary policies, especially the frequent window-guidance, have started to bite,'' said Sun. ``Banks have got the message that the government will be firm- handed this year from various government meetings over the past two months.''

China's banking regulator last quarter banned seven banks including Agricultural Bank of China from making new loans, according to the official Shanghai Securities News.