Economy

Will China's inflation spiral out of control?

(Xinhua)
Updated: 2011-03-09 09:59

BEIJING -- Worries are mounting over China's imported inflationary pressure this year and the possibility that prices may become uncontrollable after oil prices rose to a 29-month high on Monday due to the unrest in Libya.

However, officials and economists in Beijing said that inflation will not spiral out of control and the target to contain inflation at around 4 percent is attainable.

Premier Wen Jiabao said on Saturday during the opening of the fourth session of the 11th National People's Congress (NPC) that China would make stabilizing consumer prices a top priority this year while holding inflation at around 4 percent.

"Recently, prices have risen fairly quickly and inflation expectations have increased. This problem affects people's well-being, bears on overall interests and affects social stability, Wen said.

The move demonstrated the government's increasing concern about rapid price hikes and its determination to keep inflation in check.

Yao Jingyuan, a chief economist with the National Bureau of Statistics (NBS), said at a forum on Saturday that the chances of runaway inflation are very slim due to the country's bumper grain harvests over the past seven straight years, its overall balanced industrial market and excess capacities in some industries.

China's January inflation remained high at 4.9 percent, despite a series of measures to cap price rises.

The growth accelerated from 4.6 percent in December but was lower than the 28-month high of 5.1 percent in November.

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Also, the People's Bank of China (PBOC), the central bank, boosted the reserve requirement ratio for commercial banks eight times since the beginning of 2010 and raised interest rates three times to rein in inflation.

The banks' reserve requirement is currently at a historic high 19.5 percent.

"China is taking measures to mop up excess liquidity on the market as early and as fast as possible, laying a solid foundation for stabilizing overall prices this year," said Yang Ziqiang, governor of the Jinan branch of the PBOC.

However, higher grain prices, resulting from adverse weather conditions worldwide, surging prices of oil and other commodities are adding imported inflationary pressures on China.

The global commodity price surge is due to the US quantitative easing monetary policy and low interest rates by some developed economies, said Li Daokui, a central bank monetary policy advisor.

On Monday, crude prices in New York climbed to a 29-month high at $105.44 per barrel, due to escalating unrest in Libya.

Zhang Liqun, a researcher with the Development Research Center of the State Council, told Xinhua on Tuesday that imported inflationary pressure faced by China is not as high as people think since surges in global commodity prices would just be temporary.

"The world's emerging economies have experienced vigorous recovery from the financial crisis, but serious inflation came along with it. As a result, commodity demands of those countries will decline as they take measures to cool their economy this year," said Zhang.

He also noted that developed countries were recovering relatively slowly from the crisis, which would not support the constant rise of commodity prices.

"The prices this year will be generally stable, and the target to keep inflation around 4 percent is attainable," according to Zhang.

In order to reassure public confidence, Wen said that the country has excess supply in major industrial products, ample grain reserves and abundant foreign exchange reserves, which the government says it will "make the most of" in its fight against inflation.

The government has included liquidity management, production increases and an intensified crackdown on price speculations and hoarders in its policies, thereby showing its resolve to keep inflation under control.