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Rising Inflation in China

Rising inflation is becoming an increasing problem in China. China’s consumer prices increased by 4.4% from a year-ago in October, up from 3.6% in September. The prospect of elevated inflation in the coming months means authorities will breach the 3% full-year inflation target. So concerned about the surge in prices, the Chinese government is moving towards imposing temporary price controls. Similar moves were introduced back in January 2008. Given the command and control structure of the economy, despite three decades of reforms, the price control measures will work as they did in 2008. So concerned that spiralling food prices could lead to unrest, the government intends to crack down on hoarders and speculators. Subsidies for low-income households and possibly food and natural gas price controls could be in store could be introduced soon.

 

Excess liquidity will also fuel inflation. October’s inflation jump pushed China’s real deposit rates further into negative territory and real lending rates to their lowest point in nearly two years. Stubbornly strong bank lending continues to fuel liquidity and inflation pressures. Industrial production and fixed asset investment are cooling but continue to grow at a healthy clip. House prices are still rising despite draconian measures to contain them. The expanding money supply will ultimately translate into stronger growth and higher inflation. To meet authorities’ 7.5 trillion yuan lending target for 2010, average monthly lending must slow to about CNY310 billion per month for November and December. Clearly, more monetary tightening will be needed to rein in the banks as well as food prices.

Global Economic Insight and Analytics expects further monetary policy is on the cards, including further interest-rate hikes and higher bank capital reserve ratios. Rising inflation also reinforces the need for further Renminbi appreciation. Faster yuan appreciation would help lower imported commodity prices and inputs used in the production process. Indeed, authorities have allowed the Yuan to appreciate further in recent days. Nevertheless, Global Economic Insight and Analytics does not expect the currency to rise sharply against the dollar, but China will allow the Renminbi to appreciate by around 5% in each year.



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