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Roach: China's Inflation Challenge Ahead

Monday, 08 Sep 2008 09:59 AM

The 2008 Summer Olympic Games are over, but China's leaders must win one more challenge if they want the Chinese economy to continue growing, says Morgan Stanley Asia Chairman Stephen Roach.

They must take inflation seriously enough to get it under control, he stresses.

"China's pro-growth policy bias is once again coming through loud and clear, reflecting a shift in its policy stance that seems traceable to events far bigger than the Olympics," Roach writes in the Financial Times.

Too often, Roach says, Chinese officials dismiss the build-up of inflationary pressures as the result of labor reforms that have boosted minimum wages, an outbreak of "imported" commodity inflation and international price equalization.

It isn't that China's policymakers are ignorant about the increasing downside risks to the country's economic health.

Indeed, Roach says that just the opposite is true. That's why Chinese leaders have relaxed bank lending quotas and allowed the pace of currency appreciation to slow.

However, Roach notes that policy interest rates have been left unchanged in a rising inflationary climate. Keeping real short-term interest rates close to zero will stimulate any country's monetary policy, he says.

"The recent pro-growth policy initiatives suggest that Chinese authorities are attempting to put a floor on the gross domestic product growth shortfall of somewhere in the 8 to 9 percent range," Roach observes.

"Perhaps the biggest macro question for China over the next year is whether such a slowing from the torrid growth pace of nearly 12 percent in 2006-07 is sufficient to stem the recent build-up of inflationary pressures," Roach says.

Recent comments from Cheng Siwei, former vice chairman of the Standing Committee of the National People's Congress, support Roach's point.

"China is experiencing a temporary economic slowdown rather than a downturn," Cheng told China Central television, adding that he believes the Chinese economy is facing merely a slowdown, not a watershed.

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The 2008 Summer Olympic Games are over, but China's leaders must win one more challenge if they want the Chinese economy to continue growing, says Morgan Stanley Asia Chairman Stephen Roach. They must take inflation seriously enough to get it under control, he...
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