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Controlling inflation is top priority

15:53, May 04, 2011

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By Li Hong

The State Council's hopes of staving off elevating prices and controlling annual inflation within 4 percent at the end of this year seem increasingly elusive, as the policy-makers' reluctance to step up tightening in the first five months would cause bigger credit and asset bubbles in the coming months.

The desired core inflation rate for a big emerging economy like China is between 2-3 percent. The 4 percent target is apparently a bit too high. Any excess galloping from 4 percent won't bode well for the health of the economy.

A growing number of the public – including aged pensioners, laborers earning tiny incomes and white collar workers who have a big family to support -- are complaining that the central government has been too indecisive and skittish to address price rises. As inflation soared to 5.4 percent in March and prices are rising across the board from food to utilities to industrial products, it is natural for the average residents to shout out their disapprovals.

A group of Chinese economists presage an economic turbulence late this year or early next year that would make the job harder to harness a complex economic situation – inflated prices, inflated inflows of foreign speculative capital, and deflated growth of the economy.

Now it is time to take forcible measures, before bubbles are getting unbearably bigger and explode sinking the world's second largest economy. The prescriptions are: Two decisive moves of interest rate rises in May and June – raising the benchmark one-year lending and saving rates by 25 basic points apiece; and a one-off 5 percent hike in the value of the yuan against the U.S. dollar.

It is hoped that two consecutive interest rate rises will considerably dampen the public's expectations for more outsize inflation, as higher rates encourage deposits but restrain lending from banks. Also, one-off 5 percent currency appreciation would effectively curtail inflows of overseas funds, taming imported inflation while restricting central bank's supply of yuan credit, because it has to buy all those foreign currency influx with local currencies.

Of course, appreciation of the yuan could also be realized – other than a one-off shoot-up – in a relatively short period of time via market forces. By enlarging the trading band of the yuan on the foreign exchange market, the central bank may allow a precipitous rise in the yuan value, say 5 percent in two weeks.

If the authorities were to keep on its piecemeal move of interest rate and exchange rates as before, inflationary pressure would just keep building up. The CPI index has hovered above 5 percent for the past two months, it is feared not to peak till the end of 2011. By then, people's complaints would become louder and messier as they feel increasingly insecure.

The People's Bank of China, the central bank, in its first-quarter monetary policy report yesterday, said controlling inflation will remain to be its top priority. Surely, stabilizing prices and managing inflation expectations are critical, but speeches and avows not substantiated with decisive measures are to attain nothing. And, concentrating on raising banks' required reserve ratios, even to historical highs, while avoiding price tools – interest rates and exchange rates, will prove to be fairly inadequate to combat inflation.

The global economy has entered a starkly different phase since the 2008-09 western financial meltdown happened. To come out of a devastating economic recession, the United States, Japan and other western countries incepted so-called “quantitative easing” policy – with central banks printing money and buying government debts – to flood their financial markets with excess liquidity. Whether the QE would ease their economic crunch and lead to sustainable growth remain to be seen, but huge torrents of the flood have been flowing to countries like China.

In extraordinary time, Beijing authorities need to take extraordinary tools. “China is seeing increasing pressure of imported inflation,” the central bank's report read. In addition to faster and bigger pace of exchange rate and interest rate rises, the regulators should tighten checks and levy higher taxes on foreign capital spillovers to China.

The articles in this column represent the author's views only. They do not represent opinions of People's Daily or People's Daily Online.

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About this column

Li Hong has been a reporter and column writer, mainly on China's economy and politics.

He was graduated from Beijing Foreign Studies University, and once studied in University of Hawaii and the Poynter Institute in Florida.


Dai MinJohn
Dai Min

John Milligan-Whyte and Dai Min, the executive producers and co-hosts of the Collaboration of Civilizations television series adapted by the eight books they wrote in the America-China Partnership Book Series published in English and Mandarin in 2009-2010 that created the "New School of America-China Relations." They founded the America-China Partnership Foundation and Forum in 2008 and the Center for American-China Partnership in 2005, which was recognized in 2009 as "the first American think tank to combine and integrate American and Chinese perspectives providing a complete answer for America and China's success in the 21st century."

Li HongmeiLi Hongmei

Li Hongmei, editor and columnist of PD Online.