China cooling steps justified: ex-lawmaker

DAVOS, Switzerland (Reuters) - China’s loose monetary policy has become problematic and the authorities need to take steps to manage potential inflation and investment risks, an influential former Chinese lawmaker said on Friday.

Asked if financial markets had over-reacted to lending conditions in China and an order by Beijing for some banks to comply immediately with a planned increase in reserves, Cheng Siwei said:

“Our moderately easy monetary policy now faces some problems,” he told Reuters Insider television at the World Economic Forum.

“We have to be careful on the one hand about the overheating of investment and on the other hand over the danger of inflation so we need to use the tools of monetary policy to cool down a little,” he said.

Cheng has moved markets in the past with outspoken comments on the desirability of diversifying the currency composition of China’s reserves, which bankers say are held predominantly in dollars.

Asked if the authorities would do more to tighten monetary policy, Cheng replied with comments suggesting that the world’s third-largest economy should not raise interest rates in the near term.

“Any single country cannot raise interest rates, otherwise the hot money will flow in,” he said.

In a report issued on Friday, China’s central bank pledged to maintain its loose policy stance even though inflation was likely to rise further.

China has staged a stunning economic recovery, registering annualized gross domestic product (GDP) growth of 11.3 percent in the fourth quarter of 2009 compared with 4.3 percent in the final quarter of 2008.

Reports and rumors of Beijing’s clampdown on bank lending after a credit surge in the first half of January weighed on global investor sentiment this week.

According to a recent Reuters poll of economists, China’s economy is likely to grow 9.5 percent in 2010, faster than previously forecast, and the central bank will raise interest rates twice during the year to keep inflation in check.

Writing by Tamora Vidaillet, editing by Mike Peacock