01.09.2011, 10:40
China Tries to Cool Rising Prices
OREANDA-NEWS. September 01, 2011. Since the beginning of 2011, China has taken a series of measures to cool rising prices, such as introducing a prudent monetary policy, boosting supply and containing inrrational demand while establishing a price control mechanism. However, it will be quite difficult to meet the government's annual inflation rate control target, which is around 4 percent for the year.
Zhang Ping, the head of the National Development and Reform Commission (NDRC), China's top economic planner, called for all macro control policies in force to be fully implemented, as "it could be difficult to keep the consumer price index (CPI) growth below the government's target this year."
He made the remarks at a bi-monthly legislative session of the Standing Committee of the National People's Congress (NPC), China's top legislature.
He expected the country's price level to remain high due to the pressures of excessive global liquidity, imported inflation, higher domestic production costs and temporary shortages of some kinds of farm products, as well as the consequences of natural disasters.
He said that the pressures and risks China faces could lift inflationary expectations, and make it hard to meet the price control target.
CPI remains high
In the first seven months, the CPI gained 5.5 percent from a year earlier, well above the government's target ceiling of 4 percent for this year.
In July, CPI even jumped 6.5 percent year-on-year, reaching its highest level in 37 months, placing the government in a tough position with worsening global liquidity in sight.
The Producer Price Index, which is used to calculate inflation at the wholesale level, jumped 7.5 percent year-on-year in July.
The stubbornly high inflation rate has been driven by rising food costs, which jumped by 14.8 percent in July from a year ago.
The price of pork, a staple food in China, soared by nearly 57 percent in July.
Addressing a Forum on China's Macroeconomic Conditions and Macro Policies in Singapore, Zhang Liqun, an economist from the Development Research Center, said he expected the inflation pressure resulting from surging food prices to start easing as supply increases.
Grain and rice output in China has been growing steadily in recent eight years and the production capacity of vegetables has also increased as the government has put in place incentive programs.
"Generally speaking, the food supply situation has been improving, whereas the demand is basically stable," he said.
Tan Kong Yam, director of Asia Competitiveness Institute, the National University of Singapore, said pork prices accounted for as much as 3 percent of the total basket for the CPI in China.
"A surge of 50 to 60 percent in pork price would mean a contribution of 1.7 percentage points to the consumer price index, " he noted.
The CPI in China would be 4.8 percent if the price of pork is excluded, meaning that the CPI has already started to ease, Tan said.
"I think the fall of CPI may be sharper than expected when the pork price falls in six to 12 months," he said.
The pork price began to surge in the second half of 2010, encouraging farmers to increase their stock. The number of pigs in stock has been increasing as of February, he said.
Easing the inflation pressure would be a long and slow process, and experts presume that in August, CPI would be still high.
High inflation is expected to stay for some time to come, most probably between 4 percent and 5.4 percent in 2011 and 2012, a team of economists from the Xiamen University in China and the National University of Singapore said in their latest forecasts on the China's economy released on Aug. 20 in Singapore.
Measures to curb inflation
China should still stick to a prudent monetary policy, the China Securities Journal quoted central bank advisor Xia Bin as saying last Wednesday.
Xia said the moderate rise in the yuan's value can help control imported inflation, but relying solely on the yuan's appreciation to contain inflation is unrealistic.
Under the current economic situation, the government should also continue to accelerate diversifying the allocation of its foreign reserves and the yuan's "go-global" drive, Xia suggested.
China's Ministry of Commerce stated last Wednesday that it will try to formally green light foreign direct investment (FDI) in the Chinese currency renminbi (RMB), or the yuan, in September.
"The ministry has released a draft regulation on cross-border direct investment in RMB and we'll try to put it into effect in September," ministry spokesman Shen Danyang told a press conference.
The ministry posted the draft on its website last Monday night to solicit public feedback until Aug. 31.
If implemented, the rules will expand channels for overseas-acquired RMB funds to flow back into the country.
The move is expected to give a push to the RMB's internationalization drive.
In addition to monetary policy, interest rates adjustment has drawn intense attention as well.
The central bank has raised interest rates three times and increased its reserve requirement ratio for banks six times so far this year, in a bid to tighten monetary supply and cool inflation.
The reserve requirement ratio is already at a record high of 21.5 percent and has limited room for further rises, chief economist Li Xunlei of Guotai Junan Securities said, according to Xinhuanet reports on Aug. 7.
Industrial Bank's chief economist Lu Zhengwei said there is big chance that another interest rate hike will occur in August, according to the Securities Daily.
Xu Xiaonian, a professor at China Europe International Business School, said he expected more interest rate hikes in order to solve lingering inflation.
"China still faces tough inflation in the second half of this year, due to the excessive money supply in the past two years, which is still expanding at a rapid growth," said Xu while attending the fifth annual China Bankers Forum.
Only by putting an end to the current actual negative interest rate can inflation be solved, Xu said.
But Fan Gang, a former senior advisor to the People's Bank of China, or the central bank, expressed his concern that higher interest rates could attract more hot money inflow, which could threaten the development of emerging economies.
Fan said China should make full use of the central bank bill, which is more flexible for commercial banks as a way to regulate market liquidity.
According to Fan, with excessive money supply and continuing hot-money inflow that pushes up China's foreign exchange reserves, this is the only way to bring market liquidity under control.
Global uncertainties on Chinaбпs inflation
There are a great deal of uncertainties in global recovery due to sluggish growth, rising inflation and festering debt woes in the United States. The euro zone and Japan will lead to more uncertainties in global recovery, which will affect China's economic development and complicate China's macro-economic control tasks..
On Aug. 2 U.S. President Barack Obama signed a bill lifting the nation's debt limit through 2013 and cutting the deficit by more than 2 trillion U.S. dollars.
On Aug. 5 Standard & Poor's (S&P) downgraded the U.S. credit rating from its top-notch AAA to AA-plus for the first time ever, just days after the U.S. government narrowly escaped an unprecedented debt default.
The United States raising its debt ceiling is a double-edged sword to China. In the short term, the US economy could possibly avoid suffering from a "double dip" recession and introduces the third round of the quantitative easing policy, which will reduce the global financial market risk. This is conducive to China's steady economic growth because the United States is one of China's most important export markets and is also conducive to the security of China's U.S. dollar assets and keeps the exchange rate of the RMB/US dollar stable.
In the long term, the current dispute between Republicans and Democrats on the debt ceiling warns China that the United States will ignore the interests of creditors for the needs of domestic political struggles.
In the meantime, oil price fluctuations following turbulence in West Asia and North Africa will also affect China's economic development.
The whole world is facing a common challenge of inflation, with all countries fighting with consistent macroeconomic policies and looking for more coordination internationally.
The Chinese government is sticking to its macro-regulation stance and striving to curb rising inflation, however, reaching the inflation control target will be a tough battle.
Zhang Ping, the head of the National Development and Reform Commission (NDRC), China's top economic planner, called for all macro control policies in force to be fully implemented, as "it could be difficult to keep the consumer price index (CPI) growth below the government's target this year."
He made the remarks at a bi-monthly legislative session of the Standing Committee of the National People's Congress (NPC), China's top legislature.
He expected the country's price level to remain high due to the pressures of excessive global liquidity, imported inflation, higher domestic production costs and temporary shortages of some kinds of farm products, as well as the consequences of natural disasters.
He said that the pressures and risks China faces could lift inflationary expectations, and make it hard to meet the price control target.
CPI remains high
In the first seven months, the CPI gained 5.5 percent from a year earlier, well above the government's target ceiling of 4 percent for this year.
In July, CPI even jumped 6.5 percent year-on-year, reaching its highest level in 37 months, placing the government in a tough position with worsening global liquidity in sight.
The Producer Price Index, which is used to calculate inflation at the wholesale level, jumped 7.5 percent year-on-year in July.
The stubbornly high inflation rate has been driven by rising food costs, which jumped by 14.8 percent in July from a year ago.
The price of pork, a staple food in China, soared by nearly 57 percent in July.
Addressing a Forum on China's Macroeconomic Conditions and Macro Policies in Singapore, Zhang Liqun, an economist from the Development Research Center, said he expected the inflation pressure resulting from surging food prices to start easing as supply increases.
Grain and rice output in China has been growing steadily in recent eight years and the production capacity of vegetables has also increased as the government has put in place incentive programs.
"Generally speaking, the food supply situation has been improving, whereas the demand is basically stable," he said.
Tan Kong Yam, director of Asia Competitiveness Institute, the National University of Singapore, said pork prices accounted for as much as 3 percent of the total basket for the CPI in China.
"A surge of 50 to 60 percent in pork price would mean a contribution of 1.7 percentage points to the consumer price index, " he noted.
The CPI in China would be 4.8 percent if the price of pork is excluded, meaning that the CPI has already started to ease, Tan said.
"I think the fall of CPI may be sharper than expected when the pork price falls in six to 12 months," he said.
The pork price began to surge in the second half of 2010, encouraging farmers to increase their stock. The number of pigs in stock has been increasing as of February, he said.
Easing the inflation pressure would be a long and slow process, and experts presume that in August, CPI would be still high.
High inflation is expected to stay for some time to come, most probably between 4 percent and 5.4 percent in 2011 and 2012, a team of economists from the Xiamen University in China and the National University of Singapore said in their latest forecasts on the China's economy released on Aug. 20 in Singapore.
Measures to curb inflation
China should still stick to a prudent monetary policy, the China Securities Journal quoted central bank advisor Xia Bin as saying last Wednesday.
Xia said the moderate rise in the yuan's value can help control imported inflation, but relying solely on the yuan's appreciation to contain inflation is unrealistic.
Under the current economic situation, the government should also continue to accelerate diversifying the allocation of its foreign reserves and the yuan's "go-global" drive, Xia suggested.
China's Ministry of Commerce stated last Wednesday that it will try to formally green light foreign direct investment (FDI) in the Chinese currency renminbi (RMB), or the yuan, in September.
"The ministry has released a draft regulation on cross-border direct investment in RMB and we'll try to put it into effect in September," ministry spokesman Shen Danyang told a press conference.
The ministry posted the draft on its website last Monday night to solicit public feedback until Aug. 31.
If implemented, the rules will expand channels for overseas-acquired RMB funds to flow back into the country.
The move is expected to give a push to the RMB's internationalization drive.
In addition to monetary policy, interest rates adjustment has drawn intense attention as well.
The central bank has raised interest rates three times and increased its reserve requirement ratio for banks six times so far this year, in a bid to tighten monetary supply and cool inflation.
The reserve requirement ratio is already at a record high of 21.5 percent and has limited room for further rises, chief economist Li Xunlei of Guotai Junan Securities said, according to Xinhuanet reports on Aug. 7.
Industrial Bank's chief economist Lu Zhengwei said there is big chance that another interest rate hike will occur in August, according to the Securities Daily.
Xu Xiaonian, a professor at China Europe International Business School, said he expected more interest rate hikes in order to solve lingering inflation.
"China still faces tough inflation in the second half of this year, due to the excessive money supply in the past two years, which is still expanding at a rapid growth," said Xu while attending the fifth annual China Bankers Forum.
Only by putting an end to the current actual negative interest rate can inflation be solved, Xu said.
But Fan Gang, a former senior advisor to the People's Bank of China, or the central bank, expressed his concern that higher interest rates could attract more hot money inflow, which could threaten the development of emerging economies.
Fan said China should make full use of the central bank bill, which is more flexible for commercial banks as a way to regulate market liquidity.
According to Fan, with excessive money supply and continuing hot-money inflow that pushes up China's foreign exchange reserves, this is the only way to bring market liquidity under control.
Global uncertainties on Chinaбпs inflation
There are a great deal of uncertainties in global recovery due to sluggish growth, rising inflation and festering debt woes in the United States. The euro zone and Japan will lead to more uncertainties in global recovery, which will affect China's economic development and complicate China's macro-economic control tasks..
On Aug. 2 U.S. President Barack Obama signed a bill lifting the nation's debt limit through 2013 and cutting the deficit by more than 2 trillion U.S. dollars.
On Aug. 5 Standard & Poor's (S&P) downgraded the U.S. credit rating from its top-notch AAA to AA-plus for the first time ever, just days after the U.S. government narrowly escaped an unprecedented debt default.
The United States raising its debt ceiling is a double-edged sword to China. In the short term, the US economy could possibly avoid suffering from a "double dip" recession and introduces the third round of the quantitative easing policy, which will reduce the global financial market risk. This is conducive to China's steady economic growth because the United States is one of China's most important export markets and is also conducive to the security of China's U.S. dollar assets and keeps the exchange rate of the RMB/US dollar stable.
In the long term, the current dispute between Republicans and Democrats on the debt ceiling warns China that the United States will ignore the interests of creditors for the needs of domestic political struggles.
In the meantime, oil price fluctuations following turbulence in West Asia and North Africa will also affect China's economic development.
The whole world is facing a common challenge of inflation, with all countries fighting with consistent macroeconomic policies and looking for more coordination internationally.
The Chinese government is sticking to its macro-regulation stance and striving to curb rising inflation, however, reaching the inflation control target will be a tough battle.
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