Yao: both factors constraining and boosting inflation exist in China

13:08, February 22, 2010      

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After China achieved 8.7 percent GDP growth in 2009, inflation expectations have replaced economic recovery as the top concern in China. Both inflation risks and factors against inflation exist in China, said Yao Jingyuan, chief economist with China's National Economic Bureau (NBS), to People's Daily.

China's consumer price index (CPI) declined 0.7 percent in the whole of 2009 and witnessed growth again in November and December last year. "There were neither inflation nor deflation in 2009, indicating a remarkable achievement."

Why do the public have high inflation expectations while consumer prices are stable? Yao noted three major risks:

The first is imported inflation risks. China's dependency on commodities in the international market. As long as prices surged in the international market, China will be impacted soon. In addition, "global recovery itself will bring up commodity prices."

Price of some specific products is the second problem, said Yao, "in 2006, pork price hike led to prices increasing across the whole market, while the vegetable price surge last November and December was the main reason for CPI growth."

The third lies in market liquidity. M2 (broad money supply) increased by 27 percent in 2009 and new loans totaled 9.59 trillion yuan (around 1.40 trillion U.S. dollars). High money supply and massive credit expansion raised inflation expectations, Yao said. "I believe that this is worthy of attention."

However, Yao pointed out that facing high inflation expectations, China can keep calm.

"Stable grain output and grain prices will help to keep the whole market stable. And this years No.1 Central Document is calling for stronger policies to support agriculture and the rural areas."

In addition, overcapacity in the industrial sector will also curb the increase of consumer prices. "The relation between supply and demand is the fundamental factor that decides prices."

Inadequate overall demand is believed to be the third factor that constrains inflation. Yao noted that inadequate overall demand might be the major problem for China's economy in 2010.

"Since China's reform and opening up, only when economic overheating, excessive money and credit issuance and severe food problems occurring at the same time will inflation be able to hit China."

By People's Daily Online
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