By Xin Zhiming (China Daily)
Updated: 2007-09-29 07:16

The central bank said on Friday that it will continue to adopt a "moderately tight" monetary policy in the coming months to keep the economy on the right track.

On the whole, the economy is sound, but "still faces prominent problems such as excessive investment growth, too large a trade surplus and too much lending", the People's Bank of China said in a statement on its website after a quarterly meeting of its monetary policy committee.

Moreover, problems such as continually rising inflation and asset prices have also surfaced, the statement said.

China's consumer price index surged to a decade high of 6.5 percent in August and its gross domestic product expanded year-on-year by a blistering 11.9 percent in the second quarter.

The central bank set a target of 3 percent for CPI growth early this year, although it has altered its stance as the situation has changed.

One of its research arms said in a report released on Friday that it expects inflation to reach 4.6 percent this year.

But inflation should ease to about 5 percent in the first half of next year, according to the report cited by the China Securities Journal.

It forecast the country's GDP will grow by 11.6 percent in 2007 and slow down to 10.8 percent in the first half of next year.

"The economy risks becoming overheated in terms of some indicators," Zhao Xijun, a finance professor at Renmin University of China, told China Daily.

A central bank quarterly survey of 20,000 Chinese households in 50 cities last month showed most people expected inflation to rise further in the fourth quarter.

The central bank did not say in its statement how it will implement its "moderately tight" policies, but some experts have suggested it raise the interest rate further to keep it in line with rising inflation.

The central bank will closely study different factors that caused recent inflation and asset price rises and will take "targeted" measures, according to the statement.

It has raised interest rates five times and commercial banks' required reserves seven times so far this year to mop up excessive liquidity.

Whether another interest rate hike will become a reality depends on a number of factors, said Zhao.

"There are some uncertainties, although it is possible."

If the US economy is further trapped in the crisis triggered by its current credit crunch and its consumption slows down, it may affect China's exports, which will lower the possibility of another interest rate hike this year on the Chinese side, he said.

Moreover, China's tightening measures in the first half of this year may gradually start to work in the coming months. If that happens and inflation is stabilized, another hike will not come, he said.