China may tighten cash supply as home prices fuel inflation fears


* PBOC may tighten cash liquidity to counterinflation-adviser

* Central bank policy focus on inflation, not assetprices-adviser

* China's home prices spike 9.1 pct y/y, fastest since Jan2011

* Central bank refrains from liquidity operations for 2ndday running

* Chinese property shares fall, drag on main index

By Kevin Yao and Xiaoyi Shao

BEIJING, Oct 22 (Reuters) - China signalled concern onTuesday that ample credit could fuel inflation as a reportshowed house prices jumped the most in nearly three years, withdouble-digit gains in major cities.

A policy adviser to the People's Bank of China told Reutersthe authority may tighten cash conditions in the financialsystem to address the inflation risks, while the central bankrefrained from supplying cash to money markets for the secondday running.

If it also avoids injecting cash at its next money marketoperation on Thursday, the effect will be a net weekly drain of58 billion yuan - the second biggest since February.

"(Policy) will only be tightened slightly as inflation isrising. There are some concerns on bank lending," said SongGuoqing, an academic member of the central bank's monetarypolicy committee.

"Policy fine-tuning will rely mainly on open marketoperations and I cannot see any possibility of changing interestrates or bank reserve ratios."

Song's comments and the sharp rise in house prices highlightBeijing's policy quandary.

On the one hand, policymakers want to avoid a buildup ofmarket and economic imbalances, such as a debt-fuelled propertybubble.

On the other hand, they are reluctant to use more potentinstruments to control the imbalances in case they also blunt amodest economic recovery ahead of a crucial policy meeting nextmonth.

China's house prices in September rose 9.1 percent from ayear earlier, the sharpest rise since January 2011, calculationsof official data by Reuters shows. The CSI300 ofleading Shanghai and Shenzhen A-share listings fell 1 percent asinvestors braced for possible measures to calm the propertymarket.

Song said consumer inflation rather than property pricesserved as the central bank's key policy signpost. Money markettraders said they would wait until Thursday's money marketoperation to conclude whether the central bank was trying tosend a policy signal given that short-term rates have fallensharply since the end of the third quarter.

The weighted-average benchmark seven-day repo rate has dropped nearly a full percentage point overthe last eight trading sessions.

Traders and economists believe current ample fundingconditions in the financial system reflect in part officialefforts to prop up economic growth and an effort by the centralbank to make amends after it engineered a credit crunch in theinterbank market in late June.

That move was widely seen as a warning to banks to rein inriskier lending, but the central bank appeared to have beenadmonished by the central government for the opaque way in whichthe cash squeeze was managed.

Now, however, economists believe the PBOC may have gone toofar in the other direction.


China's economy grew at its fastest clip this year in thethird quarter fuelled largely by investment, but signs areemerging that resurgent credit growth might drive up inflationeven as the recovery runs into fresh headwinds.

Consumer price inflation rose to a seven-month high of 3.1percent in September from 2.6 percent in August, data showedlast week. Tuesday's house price data from 70 major Chinesecities offered more evidence of price pressures.

Song, however, saw little risk of inflation getting out ofhand given steady demand and limited potential for a pick up ineconomic expansion as Beijing tries to gear the country more toconsumer-led growth.

The adviser predicted policy fine-tuning would be sufficientto stabilise inflation at the current level in the fourthquarter and so keep the full-year rate comfortably below thegovernment target of 3.5 percent.

Economic growth could ease to 7.5 percent in the fourthquarter from 7.8 percent in the third quarter, he said. Butfull-year growth could still come in at 7.6 percent, just aboveBeijing's 7.5 percent target, he added.

"A slowdown in growth in the fourth quarter would probablyreawaken fears of a hard landing but we would welcome it," wroteMark Williams and Julian Evans-Pritchard of Capital Economics ina research note.

"A prolonged surge in credit-fuelled investment is the lastthing China now needs."

Chinese banks made 787 billion yuan ($129 billion) of newyuan loans in September, higher than a forecast of 650 billionyuan and more than August's 711.3 billion yuan, central bankdata showed.

At the same time, yuan has poured into the economy as a sideeffect of massive intervention by the central bank intended tocurb the strength of a long-running rally in the local currency.

With the central bank seen as reluctant to use interestrates to rein in property prices, markets will shift their focusto the ruling Communist Party's key policy meeting in November,when the leaders are expected to map out how to shape theeconomy in the coming decade.

"With the issue in the property market becoming more andmore severe, the third plenum next month should touch upon theproblem," said Wang Jun, a researcher at the China Centre forInternational Economic Exchanges (CCIEE), a governmentthink-tank.

Securing more land for development to cool the red-hotmarket is one option under debate. Another is to use propertytaxes to rein in demand.

What complicates the policy response is a divergence inhouse price inflation between big and small centres.

The figures from the National Bureau of Statistics showedhouse prices in the country's largest cities continued to risemuch faster than the national average. They were up 16 percentin Beijing, 17 percent in Shanghai and about 20 percent in thesouthern cities of Guangzhou and Shenzhen.

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