Wednesday, November 17, 2010

China vows to tame inflation and intervene in prices

BEIJING: China will intervene to control consumer prices that are rising too quickly, the government said on Wednesday, Nov 17, a step that will do little by itself to tame inflation but could foreshadow harsher monetary tightening.

"We need to understand the importance and urgency of stabilising market prices and take forceful measure," the State Council, or cabinet, said in a statement after a routine meeting.

"When necessary, temporary intervention measures will be implemented on prices of some important daily necessities and production materials," it added.

The State Council singled out grain, oil, sugar and cotton as markets that it was seeking to stabilise. It also vowed to intensify a crackdown on price speculation and to punish those found hoarding commodities and pushing up prices by illegal means.

The statement made no mention of monetary policy.

"I don't believe that they will just stop here. Many people in the government are capable enough to figure out that prices controls are not that effective," said Kevin Lai, an economist with Daiwa Capital Markets.

He added that he expected the central bank to raise interest rates for the second time this year over the next two weeks.

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Worries that the government could start tightening more aggressively drove China's main stock index down by 1.9 percent on Wednesday to a one-month closing low. The index has dropped 11 percent over the past four trading days. [ID:nTST000648]

Shi Chenyu, an economist with the investment banking arm of the Industrial and Commercial Bank of China, said the harsh-worded statement showed that inflation had reached the top of Beijing's policy agenda.

"Looking at history, the government often opts for iron-fisted administrative measures to control prices when inflation becomes a serious problem," Shi said.

"However, the measures were always short-lived, and more seriously, the harsh administrative measures may backfire as expectations of further price rises may intensify," he said.

A leading official newspaper had said on Tuesday that China would unveil food price controls and crack down on speculation in agricultural commodities, while central bank governor Zhou Xiaochuan highlighted inflation as a risk. [ID:nL3E6MG081]

Along with price controls, reports in the Chinese press on Wednesday pointed to interest rate increases, higher reserve requirements and more restrictions on bank lending as weapons in the government's arsenal against inflation.

Consumer inflation sped to a 25-month high in October, with prices rising 4.4 percent from a year earlier. Food, which makes up about a third of China's consumer price index, led the way, climbing 10.1 percent. Non-food items rose just 1.6 percent.

Unlike past bouts of food inflation in China, there have been no major droughts or diseases to stoke prices this year. Instead, fast money growth appears to be the primary culprit. To that end, many analysts believe that Beijing needs to do more to tighten broader monetary conditions. - Reuters


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