Inflation may peak in June; hard landing for economy 'avoidable'

09:18, June 03, 2011      

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Inflation will probably peak at the end of this month and a hard landing for the economy will be avoided, a senior economist said on Thursday, amid a manufacturing slowdown and persistent inflation concerns.

Several positive factors support this forecast, Fan Gang, a former adviser to the central bank's monetary policy committee, said in Hong Kong.

Tighter monetary policies over the past eight months have mopped up a large chunk of surplus liquidity while oil and commodity prices have stabilized, Fan said.

The prices of vegetables, which accounted for 40 percent of the inflation rate, are also stabilizing.

These factors indicate a June peak for inflation, Fan said.

The purchasing managers' index (PMI), a gauge of manufacturing activity, hit a nine-month low of 52 in May.

When the index dips beneath 50, it is regarded as a sign of recession.

Analysts predicted that the consumer price index (CPI), a key inflation indicator, is likely to hit a record high in May. It rose by 5.3 percent in April year-on-year, 0.1 percentage points lower than March's 32-month high.

Tang Jianwei, senior economist at the Bank of Communications, predicted that the CPI will reach 5.5 percent in May.

"It may continue to set new records over the next few months due to an increase in the price of consumer goods. When, and by how much, the CPI will start to fall is uncertain."

Fan also said China's economy will not experience a hard landing, despite inflation.

Fan, who is also director of the National Institute of Economic Research, a major think tank, made the comments at the China Daily Asia Leadership Roundtable on "Hong Kong and the Internationalization of the Yuan".

"Despite inflationary risks, China's economy has yet to see a hard landing looming mainly due to economic growth (of more than 8 percent)," he said.

Li Yang, deputy head of the Chinese Academy of Social Sciences, a prominent government think tank, said China cannot simply rely on monetary tools to fight inflation.

Concerns that ongoing monetary tightening measures may slow growth and increase the possibility of a hard landing intensified after the PMI figure suggested across-the-board declines.

Fan said "it is always possible" for the government to hike interest rates again if inflationary pressures continue.

But he said quantitative tools, such as the reserve requirement ratio for banks (the amount they have to set aside), and stricter loan controls, are more likely options.

"If interest rates continue to rise, it will put further pressure on the yuan to appreciate, a factor that may encourage a greater influx of 'hot money' (speculative capital) What's more, rate hikes will increase the burden on borrowers," Fan said.

To soak up liquidity and curb inflation, the central bank has raised interest rates four times since October and increased the reserve requirement for banks eight times since then. The requirement for some major banks has hit a record 21 percent.

Source:China Daily
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