Tags: China | Inflation | Target | Economist

China Inflation Target May Be Out of Reach: Economist

Monday, 10 May 2010 05:58 PM

China stands little chance of hitting the government's target of keeping inflation below 3 percent this year, a senior government economist says.
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With excess liquidity driving up prices, a more feasible goal will be to hold consumer price inflation to an average of less than 5 percent, said Liu Shijin, deputy head of the Development Research Center (DRC), a think-tank under the cabinet.

"The (3 percent) target is ideal. But China faces some difficulties in achieving it," he told a financial forum during the weekend.

The rise in price pressures stems from last year's record loan surge of 9.6 trillion yuan ($1.4 trillion), which is making an impact with a time lag of 6-12 months, Liu said.

The consumer price index (CPI) rose to 2.4 percent in the year to March and analysts polled by Reuters projected that it crept up to 2.7 percent in April. Beijing is due to report the figure on Tuesday.

Liu also said he expected the economy to grow 9-10 percent this year, with activity tapering off in the second half after an 11.9 percent year-on-year pace in the first quarter.

Ba Shusong, another senior researcher at the DRC, said the central bank would likely be cautious in raising interest rates, preferring instead to use quantitative tools, such as open market operations and required reserves, to manage liquidity.

"The ultra-low interest rate policy stance adopted by the United States and some other countries actually give China very limited scope to raise interest rates," Ba told the forum.

The central bank has raised banks' reserve requirements three times this year and stepped up cash withdrawals through its bill sales, but has yet to raise interest rates.

Some economists have forecast it may have to do so soon, with rising inflation tipping real deposit rates into negative territory.

But Ba said so long as real rates are negative for only a few months, the People's Bank of China need not immediately raise nominal rates.

The combination of excess liquidity and few alternative investments have fueled fast-rising property prices in China, with officials increasingly talking of bubble risks.

The government has thus far relied largely on administrative measures, such as enforcing higher downpayments, to cool the sector.

Xia Bin, an academic adviser to the central bank, warned investors at the same forum not to underestimate Beijing's determination to rein in housing prices.

"Don't be confused by the direction of the control measures and get deluded," he said.

Xia said it could take three years to resolve all the problems in the real the estate market, including illegal loans to local governments' investment vehicles.

As part of this clean-up process, the DRC's Ba said that China may need to find a new growth engine this year.

"The severe property tightening measures could dampen investment growth, which was the main factor pulling up the economy last year," he said.

© 2017 Thomson/Reuters. All rights reserved.

 
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China stands little chance of hitting the government's target of keeping inflation below 3 percent this year, a senior government economist says. . With excess liquidity driving up prices, a more feasible goal will be to hold consumer price inflation to an average of less...
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Monday, 10 May 2010 05:58 PM
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