Fight inflation hard

08:29, February 11, 2011      

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The latest interest rate hike that China announced on Tuesday was surprising only in its timing. To sustain sound and stable economic growth, Chinese policymakers must take more measures to prevent inflation from escalating further.

For the third time since October, the People's Bank of China raised its benchmark one-year deposit rate by a quarter of a percentage point, to 3 percent, and its one-year lending rate by a similar amount, to 6.06 percent.

The timing of the announcement, at the very end of the lunar new year holiday, displays an extraordinary sense of urgency. Had the pressure of accelerating inflation not been so huge, Chinese central bank officials would not have needed to break their holiday to take action.

Though the country is yet to release January's growth and inflation figures, it is thought that the consumer price index (CPI) hit a new high last month after reaching a 28-month record of 5.1 percent in November.

By delivering another rise in interest rates after two increases late last year, policymakers are addressing a particular concern about the rising food prices. A prolonged drought that has hit northern China extremely hard has called for extra tightening measures to ensure overall price stability.

China's economic planning agency on Thursday announced a rise in minimum rice purchase prices this year. The purchase price for japonica rice will rise 21.9 percent to 128 yuan ($19.4) per 50 kilograms, while the price for early indica rice will increase 9.7 percent to 102 yuan per 50 kg and for middle-late, 10.3 percent to 107 yuan.

Since rice and wheat are two major grain crops in China, such a boost in rice prices not only speaks of how severely the four-month drought has affected the wheat growing regions, it also reveals the looming pressure of more food-led inflation later this year.

In addition to such domestic factors as rising food prices and labor costs, the super-loose monetary policies that major developed economies have adopted to inflate their way out of recession are also undermining the country's efforts to curb inflation by driving a large amount of capital flows into emerging economies including China.

In a rare criticism of another central bank's policies, the US Federal Reserve Chairman Ben Bernanke even called China's interest rate hike a "surprising" way to tackle inflation, urging Beijing to let its currency rise instead.

Such remarks indicate that the United States is far from even recognizing the danger of too much cheap money, which, to a certain extent, led the world into the worst global financial crisis in more than 70 years in the first place, and now threatens to fuel runaway inflation in many emerging economies.

China's fight against inflation will determine its chances of maintaining sound and stable growth without risking either overheating or a hard landing. As the world's second largest economy, China's success is important for a lasting global recovery that seems to hinge more than ever on the solid growth of emerging economies.

Source: China Daily
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