The government's loose monetary policy that helped put the nation back on a solid economic footing will continue next year, but economists said that doesn't rule out any flexibility in the policy to stave off potential problems like inflation.

The economic strategy for 2010 was laid out at Monday's Central Economic Work Conference. Officials at the conference decided that China will continue with its expansive fiscal and eased monetary policies.

Researchers, however, have said they are concerned that the proactive strategy will create excess liquidity and eventually to rising inflation next year.

Economists reassured critics Monday, saying authorities will make policies more flexible to adjust to any economic situation. Authorities, economists said, could also fine-tune the yuan exchange rate to ensure growth.

The unaltered stance at the conference will ensure policy continuity to anchor the economy, although the nation is set to achieve its economic growth goal for this year, said Zhang Xiaojing, economist of the Institute of Economics of the Chinese Academy of Social Sciences.

"But it doesn't mean it will not be adjusted when necessary," Zhang added.

China's new yuan loans have reached 8.9 trillion yuan (US$1.3 trillion) in the first ten months of this year, 5.26 trillion yuan (US$760 billion) more than the same period last year. It is estimated that it will be approximately 9.5 trillion yuan (US$1.4 trillion) for the entire year.

Economists and officials forecast that next year, loans could reach 8 trillion yuan (US$1.2 trillion) because abrupt tightening of the supply of money could hurt economic growth and derail the ongoing recovery.

Lian Ping, chief economist at the Bank of Communications, said it could be between 8 and 9 trillion yuan (US$1.3 trillion) next year.

"China's investment growth could be 25-30 percent next year, which alone will need about 3.5-4 trillion yuan (US$510 billion to US$590 billion) from the money supply," he said.

More money will be needed to fuel industrial production and other economic activities, he said.

The Central Economic Work Conference also decided that control of the household registry system in small- and medium-sized cities and towns will be loosened to allow a greater flow of people from the countryside. The move, Ling said, will lead to a real estate boom.

"The increasing demand for houses will also increase demand for currency in circulation," the economist said.

However, the increased supply of currency may not lead to uncontrollable inflation next year, although it is set to rise higher than this year, economists said.

Internationally, the weak US dollar drives capital into emerging markets, including China. Meanwhile, the trend of rising grain and commodities prices has become obvious. China's reform in prices of energy and natural resources, such as oil and the industrial-use of water, will further put pressure on a rise in inflation.

While these factors could push up inflation, the effects of China's massive amounts of new yuan loans on inflation has been exaggerated, said Wang Guogang, economist at the CASS' Institute of Finance and Banking.

Wang's research shows that a "significant" amount of the new yuan loans have not entered the real economy, because, for example, many people and enterprises just placed their money in bank accounts.

Many economists said the rate of inflation could be as high as 3-4 percent next year, which they say is controllable compared with a minus-1.1 percent for the first three quarters of this year. They also cautioned that authorities should be careful to avoid unexpectedly strong price rises.

(China Daily December 8, 2009)