The Central Economic Work Conference was held in Beijing on December 3-5, setting the tone for China's economic development in 2008.

Just say no: inflation and overheating

Senior economist Zhang Yongjun with State Information Center stated the primary tasks next year would be two "preventions": preventing the already fast economic growth from becoming overheated, and preventing the price increases from creating real inflation.

"This shows a new change in the development tasks," said Zhang.

Zhang said the Central Government has proposed to maintain a "prudent fiscal policy and tightened monetary policy, which are the biggest policy changes in a decade.

After the 1997 Asian financial crisis, China adopted "prudent monetary policy" to cope with the serious regional economic situation. From 1998 to 2002, in order to manage deflation, China chose to increase its money supply. Starting from 2003, the fast growth in domestic loans, investments and foreign reserves changed the Chinese economy significantly. Newly added loans in the first 10 months this year were 110 percent more than the total last year. Meanwhile, the broad money supply (M2) by the end of November grew 18.45 percent year on year, while the growth rate was 1.51 percent more than that of the same period last year.

Yet excessive liquidity still exists and consumer prices are still on the rise.

"The monetary policy has been changed from ‘prudent' to ‘tightened,' which sends out a strong signal to further tighten the money supply," said Zhang. "It is a correct decision made by the central government based on macroeconomic performance."

One week after the completion of Central Economic Work Conference, People's Bank of China, the central bank, announced that lenders must put another 1-percentage-point deposit with the central bank effective from December 25.

This reserve requirement ratio increase will absorb 400 billion yuan ($54.05 billion) and is the largest rise in two years. Previously, the ratio was raised 0.5 percentage points each time. In total, the central bank has raised the reserve requirement ratio 10 times this year.

Zhang predicts that the tightening effort will continue. In the future, the central bank will possibly combine market policy and administrative policy and come up with series of monetary controlling measures.

Ha Jiming, Chief Economist with China International Capital Corp., said that under the tightened control, foreign reserve growth next year will be slower than this year. Ha forecasts that the 2008 broad money supply (M2) growth will decrease to 16-16.5 percent from the estimated 17.6 percent of this year. Moreover, money available to buy stocks might also decrease next year.

Preventing investment from rebounding is also a key task. The Central Economic Work Conference said that in 2008, China will continue to control financial expenditures, strictly control newly added projects, and maintain the economic growth rate at a rational level.

According to the latest statistics from National Bureau of Statistics, the fixed asset investments are still running at a high speed. In October, urban fixed assets investments grew 30.7 percent year on year, up 13.9 percentage points over the same period last year. By the end of October, a total of 6.67 trillion yuan ($901.35 billion) was invested in newly started projects, rising 26.5 percent year on year, the highest growth since May 2006.