Inflation is the main long-term risk for China as the economy makes a transition from a planned economy to a market-based one and deeper financial reforms are needed to complete the move, central bank governor Zhou Xiaochuan said on Saturday.
There is a general tendency for overheating impulses during China's economic transition process and we should always stress the need to control inflation, Zhou told a financial forum.
In most occasions, pressures from various sides is to loosen monetary policy to spur growth, but there is less push for preventing economic overheating and inflation, he said.
A main feature of China's economic transition is that many entities, including local governments, are not subject to soft constraints, which means they tend to spend more and fuel economic overheating, Zhou added.
China's annual inflation eased to 1.7 percent in October from 1.9 percent in September after a two-year fight by the central bank to bring it back under the government's 4 percent target after the effects of a 2008-09 economic stimulus programme lifted CPI to a three-year high of 6.5 percent in July 2011.
The policy tightening needed to do so pushed required reserve ratios (RRR) at commercial banks to a record high of 21.5 percent as the central bank strove to lock up excess liquidity that fuelled speculative investments and drove up basic prices. The downturn encountered by China subsequently, as the European Union's sovereign debt crisis has festered and sapped demand for Chinese exports from its single biggest market, has complicated the policy backdrop.
During the current policy cycle, the People's Bank of China (PBOC) cut interest rates in June and July this year and has lowered required reserve ratios (RRR) three times since late 2011 to free an estimated 1.2 trillion yuan ($190 billion) for lending as part of a year-long programme of pro-growth policy fine-tuning.
The central bank, though, has cautiously held off on more aggressive easing, opting instead to pump short-term cash into money markets to ease credit strains, a move analysts say reflects Beijing's concerns about reigniting property speculation and inflation risks.
It also liberalised the interest rate environment with its June and July cuts to give commercial banks more room to set both lending and deposit rates competitively.
The PBOC is not independent, unlike the U.S. Federal Reserve or the European Central Bank, as it needs the cabinet's green-light on key