By staff reporter Fu Yanyan

(Caijing.com.cn) The People's Bank of China, or the central bank, should shift from its moderately loose policy stance and signal clearly that it will stabilize money supply in the second half as inflationary fears return, a government researcher said.

Xia Bin, a director at the Development Research Center of the State Council, said on June 4 that M2, the broadest measure of money supply, typically grows at 14 percent to support a 10 percent expansion in gross domestic product. However, he said, money supply growth is currently far above 20 percent.

Central bank figures show M2 grew 25.7 percent year-on-year in May to 54.9 trillion yuan.

Xia said easier monetary policy has boosted domestic demand, which had been depressed by a lack of confidence, but it cannot increase external demand.

Rather, it leads to inflationary expectations and rising asset prices, he said.

The economy showed signs of recovery in the first half as rising domestic investment offset falling external demand, but the foundation for recovery is not firm and consumption growth is faltering, Xia said.

With a return to pre-2007 economic conditions unlikely in the next two or three years, China's economy is still vulnerable to excess industrial capacity and another rise in non-performing loans lies ahead, he said.

Xia also noted that growing expectations of higher inflation could damage asset prices.

Full article in Chinese: http://www.caijing.com.cn/2009-07-04/110193209.html