Mounting inflation pressure tests policy makers

Updated: 2010-11-11 20:23


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BEIJING - Inflation in China in October soared to a 25-month high of 4.4 percent year-on-year as new bank lending exceeded market forecasts, increasing the pressure on Chinese policy makers to rein in inflation.

Surging food prices pushed China's consumer price index (CPI), a major gauge of inflation, higher than the market forecast of around 4 percent and much more than September's 3.6 percent.

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From January to October, China's CPI rose 3 percent year-on-year, hitting the government's target ceiling for the year, the National Bureau of Statistics (NBS) said Thursday.

"China needs to do more to keep this year's inflation under the target ceiling," NBS spokesman Sheng Laiyun said.

The price of food, which accounts for one third of the basket of goods used to calculate China's CPI, surged 10.1 percent year-on-year in October because of price increase on the global agriculture markets and frequent natural disasters at home, Sheng said.

Although new bank lending in October dropped to 587.7 billion yuan ($88.5 billion) from 595.5 billion yuan in September, the October figure was still higher than market estimates of less than 500 billion yuan.

Pressure for further price increase is mounting and the quantitative easing policies of other economies will fuel inflation expectations within China, Sheng said.

Analysts said the quantitative easing policies will exacerbate the excess liquidity problem, resulting in further hot money inflows into emerging economies like China, and might complicate China's policies against inflation.

Making things worse, the widening interest rate gap between China and other major economies might attract more hot money to China.

The Chinese government has worked to cool inflation while maintaining its economy's momentum after the global financial crisis.

China's central bank raised benchmark interest rates last month and ordered banks to set aside more reserves Wednesday in its latest effort to rein in liquidity.

The central bank decision to raise the reserve requirement ratio instead of lifting interest rates indicates policy makers are sensitive to raising rates as it may prompt further hot money inflows, said Zhao Xijun, a finance professor at Renmin University.

"There is a good chance the central bank will raise interest rates again before the end of the year," said China Galaxy Securities economist Zuo Xiaolei.

China's top priority is preventing hot money inflows, said Xia Bin, director of the finance research institute under the State Council's Development Research Center.

Zuo agreed with Xia, adding that interest rate hikes together with strengthened capital controls against hot money inflows will cool inflation.

Zhou Xiaochuan, the central bank governor, said Friday Chinese regulators will work to prevent abnormal capital inflows by bolstering foreign exchange controls and maintaining overall liquidity at a proper level.

The State Administration of Foreign Exchange also vowed to increase checks on foreign exchange businesses to curb inflows of hot money.

Some economists said China should reform its CPI calculation system, which they called outdated and misleading if used as an indicator for policy making.

Chinese CPI calculations take 1993 as their base year.

"After 20 years of development, the CPI-calculation system is outdated," said Yi Xianrong, a researcher with the Institute of Finance and Banking of the Chinese Academy of Social Sciences.

"The system must be improved to adapt to the new conditions," Yi said.

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