China should consider policies to tighten its monetary policy to prevent the world's third-largest economy from overheating as growth is likely surge this year, the Asian Development Bank said on Friday.
With monetary conditions looking unduly loose, there is a need for tightening with focus on reining in lending and raising actual cost of funds.
China took an unexpected step towards tightening on Tuesday by increasing banks' reserve requirements, although market players say it would only marginally succeed in curbing inflows of speculative capital.
"No country has responded as effectively and as resolutely to the crisis as China has. With the global economy recovering and with China's growth now surging, there may be a need for change in policy settings," according to a study commissioned by the Manila-based ADB and completed before the reserve hike.
The ADB estimates developing Asia will grow 6.6% this year after expanding 4.5% in 2009, with China charging ahead with forecast growth of 8.9%.
"The fact that the (Chinese) authorities have already begun a range of tightening measures reflects their growing concerns over possible asset bubbles and other distortions," the study said. It cited efforts by China to require big banks to raise their capital adequacy ratio to cut the risk of a rise in bad loans.
The study, titled "Impact and Policy Responses - People's Republic of China", also said the yuan is probably undervalued and should be allowed to appreciate gradually.
"A shift to a gradual appreciation of the exchange rate anchored in a new exchange rate regime such as the 'basket-band-crawl' regime adopted by countries such as Singapore might be more appropriate."
Source: ReutersCourtesy moneycontrol.com
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