Inflation and liquidity

Updated: 2013-03-14 07:04

(China Daily)

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The vow by senior central bank officials to focus on controlling inflation this year offers much-needed reassurance for the public that concerted efforts will be made to subdue price rises in the face of the domestic and global boom in liquidity.

Zhou Xiaochuan, governor of the People's Bank of China, said on Wednesday that the central bank's monetary stance had shifted to a neutral one and measures would be taken to tame rising prices. His remarks are in line with the message sent by the central bank's fourth-quarter monetary policy report, released last month, which said its policy priority had shifted from economic growth to inflation.

China's consumer price index rose by a 10-month high of 3.2 percent year-on-year in February, up from 2 percent in January.

In terms of the month-on-month change, which reflects the short-term price movement more accurately, the rising price trend has been more obvious. It was 1.1 percent in February, compared with 0.1 percent in November, 0.8 percent in December and 1.0 in January.

The fast rises in home prices in some major cities since last year have also caused concern, since such rises not only make buying a home more expensive, they also drive up the prices of related products, further fueling inflation.

Given Zhou's comments and the government's decision to set the growth target of M2, the broad measure of money supply, at 13 percent for 2013, compared with last year's real growth of 13.8 percent, the authorities are clearly aware of the need to curb rising prices.

However, controlling prices will not be an easy task. The struggling economy needs monetary support to make its recovery more predictable, but injecting more money when a pool of money has already piled up as a result of the massive stimulus package that was launched to combat the effects of the 2008 global financial crisis, could possibly fuel inflation if it is not well managed.

The external environment adds to the difficulties Chinese policymakers face in controlling inflation.

Led by the United States and Japan, some developed economies have been loosening their monetary policies with a view to boosting their own growth. This has raised the risk of some of the global capital flowing into emerging market economies, such as China. Domestic policymakers should remain vigilant.

(China Daily 03/14/2013 page9)