Wednesday, February 20, 2008

China Likely to Continue Tightening Policy to Tame Inflation

by Richard York

Economic analysts are of the opinion that the rising inflation pressure will force the Chinese policy makers to continue with their tightening policy despite the global economic slowdown due to the sluggish US economy. Analysts say that the Chinese leadership is most likely to tighten its monetary policy still further and let the Yuan quickly appreciate so that rising inflation can be tamed in the wake of the risen consumer price index or CPI, which gained by 7.1% which is its highest level recorded for more than eleven years. Many experts had anticipated that the National Bureau of Statistics would declare an increase of about 7% to 7.5% when the worst in half a century snowstorm hit the nation and caused traffic blocks as well as shortage of food items in many parts of the country.

Chairman of China Equities at JPMorgan, Jing Ulrich, opined that it is unlikely of the Chinese leadership to relax its tight monetary policy unless the supply of food is normalized and also the rising inflation cools down. Goldman Sachs is of the opinion that the inflation rate will inflame in February. Goldman Sachs also added that the January inflation figures did not fully represent the impact the snowstorms has had on inflation. The numbers for the Consumer Price Index of February will be announced on the 11th of March and these figures would be quite higher than even 7%, the agency also said that it is likely that these figures might touch or get quite near to the double digit levels. In the Consumer Price Index the commodity of food accounts for as much as 1/3 and was the main reason behind rising inflation, however analysts say that it is also likely that price pressure can spread to other commodities.

In January the prices of food shot up by 18.2% whereas the inflation for non food price remained at 1.5%. The inflation for producer price index also raced greatly in January which rose by 6.1% as per the announcement made by the National Bureau of Statistics. The rapid appreciation of the Yuan in recent month was the strategy that was employed by the policy makers to tame inflation. The Yuan gained by 1.6% against the dollar in January. Ulrich of JPMorgan said that the biggest hurdle in the monetary tightening policy of China is the global economic slowdown due to the US economy and the fresh interest rates cuts introduced by Fed.

Although China has to continue with its monetary tightening policy unless there is clear evidence that prices decline, the Chinese leadership at the same time is well aware of mounting external risks to the economy, JP Morgan’s Ulrich further added. Analysts like Daniel Melser and Ruth Stroppiana, with Moody’s Economy.com held that economic slowdown led by US has got the Chinese leadership in a dilemma. They also added that root problem of the rising inflation is rapid money growth.

 

 

 

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