China's money policy more complex with Japan quake, oil price

17:41, March 17, 2011      

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China will continue its efforts on containing the inflationary pressure by further tightening the monetary policy, however, the task is getting more difficult as the impact of the devastating Japan quake on China and the global economy has yet to be assessed.

The People's Bank of China, the central bank, has stepped up the open market operation in March to drain market liquidity. The interest rate of the 10-billion-yuan one-year central bank notes issued on Tuesday this week stands at 3.1992 percent, which is 19.9 base points higher than the one-year term deposit interest rate.

That has again sparked the expectation for interest rate hikes as the interest rate of the one-year central bank bills is traditionally regarded as an indication for benchmark interest rates. Sun Mingchun, chief economist for Greater China at Daiwa Securities, thinks the central bank will take the action very soon.

Expectations of a hike in China's interest rate have been high among international investment banks since China's consumer price index began to ride high particularly at the end of last year.

Economists with international banks like UBS, JPMorgan Chase and Barclay have all forecasted more actions by China's central bank to control the country's inflation, including interest rate increases.

Zhou Xiaochuan, the governor of the central bank, has also said recently that interest rate remains very important in the policy tool kit to tame the inflation. Other choices include the deposit-reserve ratio and the revaluation of the Chinese currency.

However, liquidity is only one side of the story. As the world's second largest economy, China is also facing the pressure of imported inflation.

The oil prices are adding fuel to the inflationary pressure. The Paris-based International Energy Agency (IEA) reports that the international crude oil benchmark prices surged by 10 to 15 U.S. dollars per barrel by mid-March from the average in February, pushing Brent crude in London and the light, sweet oil prices at the New York Mercantile Exchange, which both exceeded 100 U.S. dollars per barrel.

The IEA warned that if the world oil prices remain high or push even higher, the world economy could slow down significantly by September this year.

That has led to the strong expectation for further increase in fuel oil prices in China. Some analysts think it could happen next week. Higher fuel prices could bring more inflationary pressure.

However, the unprecedented devastating earthquake which jolted Japan adds unexpected uncertainties to the global economy. As the nuclear accident is still going on, it is too early to assess the economic costs of the earthquake.

Yin Zhongli, a financial researcher at the Chinese Academy of Social Sciences, thinks that China may moderate its pace of interest rate hikes as it takes more time to take decisions in the context of a new situation.

The demand from Japan has declined after the earthquake, which has already brought commodities prices down on the global market. Crude for April delivery in New York and London markets plunged 4 percent on March 15.

However, international investment banks expect the demand from Japan to surge once reconstruction begins in that country, which would in turn push commodity prices higher and put the world economy under more inflationary pressure again.

But just like there is no timetable when Japanese manufactures can resume production, neither is there any timetable for the start of the reconstruction of the country.

As long as the uncertainties brought about by the nuclear leakage remain, it will be hard for the Asian market to stay stable, experts say.

The Tokyo stock market closed down by 1.44 percent on Thursday after a robust rebound of 5.58 percent on Wednesday following a 10.55 nosedive on Tuesday over a panic sell-off.

By Li Jia, People’s Daily Online

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