China said it would shift monetary policy from prudent to tight, but gave few specific details regarding the policy.
At the same, The Wall Street Journal reported that China's State Information Center, a think tank under the National Development and Reform Commission, said in a report published in the China Securities Journal that China should let the dollar-yuan rate move as much as 1% above or below the central parity rate [subscription required] in each daily trading session, up from 0.5% now.
China's sizzling economy has grown by over 10% annually for more than four years, and many economists expect another double-digit GDP gain in 2007, despite the Chinese government's effort to cool the economy. In 2006, China's GDP totaled $10.2 trillion in purchasing power parity terms and $2.5 trillion in real terms, according to research by the U.S. Central Intelligence Agency.
Further, China's red-hot economy has led to remarkable gains in export sales, which generated a 2006 $249.9 billion trade surplus versus the rest of the world, according to CIA research. Many economists expect the trade surplus to increase to $270-280 billion in 2007 and $310-330 billion in 2008.
Economic Analysis: At the outset, economists will most likely interpret the above monetary policy change as another incrementally positive step by China, but the government has provided too little information in today's announcement to form a substantive conclusion regarding the policy's impact. Because of China's tendency to provide scant information, economists will focus on the country's demand for commodities and purchases of raw materials, along with its trade and GDP statistics, to help gauge the condition of China's economy.
As of this juncture, few economists expect to see any meaningful slowing of the Chinese economy in 2007, when yearly data is released in a month or so, and will instead look for signs of a slowing economy in Q1 2008.
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