Tags: China Targets Inflation as Fiscal Priority

China Targets Inflation as Fiscal Priority

Monday, 07 Mar 2011 07:14 AM

China will cut import taxes, give subsidies to the poor and encourage more food production, Finance Minister Xie Xuren said on Monday, indicating how the government plans to deploy its vast wealth to dampen inflation.

But a stronger exchange rate will play only a minor role in the efforts to stabilize prices, because appreciation is a double-edged sword, Commerce Minister Chen Deming said.

The comments by the two ministers at news conferences during China's annual session of parliament shed light on how the country is working to control inflation, which has been running near its fastest in more than two years.

Though investors have focused on the role of tighter monetary policy and the potential for a stronger currency, Beijing appears to be giving equal billing to large-scale state spending.

"We will put greater emphasis on maintaining overall price stability," Xie said, echoing Premier Wen Jiabao who said in his work report on Saturday that managing inflation was the government's top priority this year.

While the central bank has shifted to a tighter monetary policy, the finance ministry has been tasked with implementing a proactive fiscal policy, a description that refers to stimulative spending — something that would normally add to upward pressure on prices.

Xie said the finance ministry would ensure that it directs its expenditures to support the fight against inflation.

"According to the requirement of making price stability our top priority, when we implement our fiscal policies, we need to actively support the production and supply of basic necessities, such as grains, cotton, vegetables, sugar, meat, eggs and milk," he said.

Other prongs in the government's strategy would be to expand the supply of materials needed for agricultural production, such as fertilizer and pesticides, and to building up state reserves of key commodities to keep prices stable, Xie said.

"We will also futher improve the social security system, increasing subsidies to poor families in urban and rural areas to ensure that their lives are not affected by price rises."

CURRENCY APPRECIATION

At a separate briefing, Commerce Minister Chen said China would try to expand channels for grain and cotton imports in order to meet rising demand.

Although rising Chinese demand could boost global prices for these commodities, access to a bigger supply is critical to containing food costs within China.

Chinese consumer price inflation quickened to an annual pace of 4.9 percent in January, just shy of its fastest in more than two years. Food costs were the main driver, rising 10.3 percent year on year.

A stronger currency would help reduce import costs for China, but the government has been reluctant to let the yuan rise too quickly.

Although it hit new highs against the dollar on Monday, it has only gained 4 percent since being depegged from the dollar last June.

Chen said there was no reason for it move any faster.

"In the long run, the yuan is on a gradual upward trend. Right now, we must take a gradual and controllable approach," he said.

He said that appreciation was a double-edged sword in reining in prices, but did not elaborate on what he meant. Previously, Chinese officials have warned that fast appreciation would only serve to attract more hot money into the country, adding to inflationary pressure.

Chen also gave a spirited defense of the yuan policy, which is criticized by many foreign countries, especially the United States, as giving Chinese exporters an unfair advantage.

"There are still voices saying that the yuan is undervalued. That's totally unreasonable," he said. "China has never intended to undervalue the yuan to gain competitiveness. We do not pursue a trade surplus either."

With import growth set to outpace export growth, China was hoping to narrow its trade surplus for the third straight year, Chen said. China's trade surplus was $183 billion last year, down from $196 billion in 2009 and a record $295 billion in 2008.

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China will cut import taxes, give subsidies to the poor and encourage more food production, Finance Minister Xie Xuren said on Monday, indicating how the government plans to deploy its vast wealth to dampen inflation. But a stronger exchange rate will play only a minor...
China Targets Inflation as Fiscal Priority
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2011-14-07
Monday, 07 Mar 2011 07:14 AM
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