China should not yet stand down from its active fiscal and loose monetary policies, but it needs to gradually prepare expectations for an orderly exit, a senior central bank official said.
Yang Guozhong, head of the business management department in the People's Bank of China, said that the government should phase in the exit by tightening monetary policy first and then winding down fiscal stimulus.
"China does not yet have the economic foundations to adjust its active fiscal policy and appropriately loose monetary policy," Yang wrote in an article published in the latest edition of China Finance, a magazine run by the central bank.
China has increased banks' reserve requirements three times this year but kept benchmark interest rates unchanged.
With concerns rising about a renewed economic slowdown, a growing number of analysts now believe that China will stand pat on rates for the rest of 2010.
Yang said the main task at hand for the central bank was to soak up excess liquidity. He said that issuing credit quotas to commercial banks, which the government has used to clamp down on lending, was not a fundamental solution.
"We should depend on market measures, comprehensively use monetary policy tools such as reserve requirements and open market operations and draw on our interest rate policy at an appropriate time," he said, without giving any specific timing.
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