BEIJING, Mar. 2 -- China's stimulus measures were more akin to a blunderbuss than a sniper's bullet. As economist Stephen Green said, "Everything that could be done was done."
But now, there are increasing signs that the country wants to target its policies more precisely.
Following two hikes in the reserve requirement ratio of commercial banks - the proportion of money they must keep aside as reserves - it is widely believed that a new bout of policy tightening has begun.
The hikes came after the authorities imposed a series of real estate-targeted policies late last year, sending an unequivocal signal that the rapid rise in home prices is intolerable, analysts said. Interest rate hikes could also be in the pipeline if inflation continues to pick up.
However, facing the still uncertain economic recovery across the globe from the financial crisis and its murky export prospects, China is unlikely to overdo its tightening measures. Instead, it would try to nip economic overheating in the bud while ensuring stable economic growth, according to analysts.
"The State Council (the cabinet) seems to be treading a tightrope as it seeks a balance between ensuring stable growth and preventing overheating," said Standard Chartered Bank economists
Stephen Green and Li Wei in a recent report.
China's gross domestic product (GDP) growth reached 8.7 percent year-on-year in 2009, but bottomed out from 6.2 percent in the first quarter and accelerated to hit 10.7 percent in the fourth.
It is expected to rise further in the first quarter of this year, which risks triggering overheating of the economy, some fear.
Proper tightening - although the authorities may not use the term - could be adopted to cool it down, analysts said.
"China is set to implement an exit strategy (to the fiscal stimulus) as its economic growth picks up," said Zhang Xiaojing, an economist with the Chinese Academy of Social Sciences. "But it would be done in a very careful manner."
In the real estate sector, for example, the authorities have vowed to curb speculative deals while encouraging more investment in building low-cost affordable housing for low-income earners.
It is estimated that real estate accounted for about a quarter of China's fixed-asset investment last year.
Land sales and related activities constitute the main source of revenue for local governments. If house prices drop dramatically, local governments would suffer from slumping income and could be plunged into an abyss of severe debt.
"If the real estate sector were to be endangered, it would not be a problem for individuals or banks," said Zhang.
"It would be a problem for national finances" because the central government would have to save bankrupt local governments.
China: Tasked with putting its house in order
Central government also faces a dilemma in deciding on its interest rate policies.
As inflation rises - it was 1.9 percent in December and 1.5 percent in January - the market has expected an interest rate hike to come sooner or later.
While the real interest rate risks falling into negative territory due to rising inflation, any hasty adjustment of it could hurt enterprises, especially job-creating private companies, and could even shake the newly recovered economy. It could also stoke inflows of speculative capital from overseas.
"While we expect the central bank to deliver 81 base points of rate hikes this year to avoid real rates turning negative, we do not expect aggressive credit tightening to last long," said Nomura Securities economist Sun Mingchun in a recent report.
Most economists forecast that inflation could reach 3 percent in February, when consumption was active thanks to the traditional Spring Festival, which started Feb 14. And they said there was a possibility of inflation rising further in the coming months, partly due to the relatively low base a year ago.
"If inflation rises fast and GDP growth remains solid (so that an interest rate hike would not hurt it too much), it is more likely that the central bank would raise the rate," said Lian Ping, chief economist of the Bank of Communications.
But interest rate hikes are not the only tools that the authorities could use to tighten the economy, analysts said.
"The authorities can also resort to 'window guidance', or 'moral suasion' (direct order), to curb lending growth and liquidity-incurred inflation," said Lian.
Any hike would come only when the economic growth trends become clear after the release first-quarter data, said Zhang Xiaojing. Therefore, it is more likely to come in the second quarter, if the US Federal Reserve does not raise interest rates unexpectedly, he said.
Thanks to the strong rebound in exports in the past two months and China's ever-expanding foreign exchange reserves, the nation is facing unprecedented pressure to revalue the yuan, although its value has risen by more than 20 percent since the currency system was reformed five years ago.
China's foreign exchange reserves amounted to $2.4 trillion by the end of 2009. The trade frictions between the US and China have also led to mounting pressure for yuan appreciation.
Premier Wen Jiabao has vowed that the yuan's exchange rate is a matter for China's sovereign decision and said he would not bow to outside pressure. But analysts said the country could allow the yuan to be more flexible this year.
"Outside pressure should not be the factor pushing us to reform, but yuan appreciation will help us restructure our economy, helping it to become more high-tech-oriented and energy-efficient," said Zhang.
Revaluing the yuan could also be part of the fiscal stimulus exit strategy because it would increase the cost of exports. However, it would not help narrow the China-US trade gap, analysts said.
James Riedel, William L. Clayton Professor of International Economics at Johns Hopkins University, pointed out that the US trade deficit with China in essence has little to do with the yuan's value. "China will always have a surplus with the US, as do most Asian countries," he said. The US's overall deficit is in effect due to the various factors that influence the level of expenditure relative to income in the US.
"The US deficit is due to the fact that the US spends more than it earns. When you spend more than you earn, you naturally go into debt," said Riedel.