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Economist: China Must Use Many Tactics to Fight Stubborn Inflation

Monday, 13 Dec 2010 10:53 AM

Inflation in China is more broad-based and stubborn than many economists had expected, forcing the central bank to rely on a mix of tightening measures to rein in prices, Gao Shanwen, chief economist at Essence Securities, said on Monday at the Reuters China Investment Summit.

In an interview with Reuters, Gao pointed to worrying signs that China's consumer inflation is spreading beyond food, with production costs soaring in some sectors.

"Mainstream economists are not on enough of a high alert for this round of inflation. It will last a long time and recur now and then," he said.

"People think inflation is caused by shortages in farm goods, but there are some other factors behind it, which has not been given enough attention," he said.

Chinese leaders gave greater prominence to the fight against inflation in their statement on Sunday at the end of the Central Economic Work Conference, an annual meeting at which they chart policy for the coming year.

China officially raised banks' required reserves for the third time in a month on Friday.

Gao said the People's Bank of China would use a combination of higher interest rates, banks' reserve requirements and faster yuan appreciation to try to put a lid on prices.

The PBOC may have to raise interest rates three times from now to the end of 2011 and increase reserve requirements 4-5 times, while letting the yuan appreciate 4-5 percent, he said.

China will probably target new local currency lending of 7 trillion-7.5 trillion yuan in 2011, he said, higher than the other recent estimates ranging from about 6.5 trillion to 7 trillion yuan.

Gao cited rising prices for clothing, healthcare and Chinese medicine as evidence that higher wages were also contributing to broader inflation. Annual consumer inflation hit a 28-month high of 5.1 percent in November.

Annual inflation will probably peak at 5-6 percent in June or July next year before easing in the second half, he predicted.

Recent government measures to curb food prices may achieve some short-term results, but inflation tends to be stubborn, he said.

© 2015 Thomson/Reuters. All rights reserved.

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