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Take away the firewood

(China Daily)
Updated: 2010-12-13 08:02

The fastest rise in consumer inflation for 28 months has obviously left Chinese policymakers little room in which to maneuver. To strike at the root of accelerating inflation they must turn off the tap of liquidity quickly.

China's consumer inflation surged from a two-year high of 4.4-percent in October to 5.1 percent in November.

Both the recognition from the statistics office that "November's price rises are beyond people's expectations" and economic planners' assurances that inflation will probably fall below 5 percent next month will hardly calm growing public anxiety.

With an 11.7-percent surge in food prices serving as the apparent driving force behind the accelerating inflation, Chinese consumers, particularly those from low-income families, have already felt the pinch of their shrinking purchasing power.

Chinese policymakers have realized the danger of runaway inflation and deserve credit for the efforts they have made to stabilize prices. On the one hand, the Chinese government's long-term measures to support agricultural development have enabled the country to reap a bumper harvest for the seventh consecutive year, which essentially rules out a home-grown food shortage that would only exacerbate inflation.

On the other hand, Chinese policymakers recently resorted to a combination of monetary policies and administrative means to manage inflationary expectations.

After raising interest rates for the first time in nearly three years in October, China's central bank hiked the bank reserve requirement ratio three times within a month to underscore the urgency of curbing runaway lending amid accelerating inflation. Now, Chinese banks will have to set aside a record 18.5 percent of their deposits as reserves.

Meanwhile, the government has directly stepped in to cool price hikes by both drumming up food supply and cracking down on those who collude to fix prices.

These interventions have successfully stabilized certain food prices. And admittedly, it will take time for some other measures to gradually take effect. But no one should expect inflation to be curbed once and for all.

It is one thing to be patient with the fight against inflation, it is another thing to make an urgent and exact diagnosis of the root cause of mounting inflationary pressures.

In fact, after the country announced a record harvest for this year, it has become clear that the latest round of inflation is not so much about food supply as the double-digit food price hikes suggested.

If that is the case, Chinese policymakers should promptly acknowledge excess liquidity as the main culprit behind soaring inflation. It is high time to take the firewood from under the cauldron as 5.1 percent consumer inflation in November is biting deeply into the pocket of Chinese consumers, who can currently enjoy a one-year interest rate of only 2.5 percent for their deposits.

(China Daily 12/13/2010 page8)