Thursday, March 31, 2011

5 Key Methods to Curb China Inflation

China CPI (Consumer Price Index) has stayed at a high level of +4.9% YoY in both January and February this year. As the inflationary pressure remains high, China premier Wen Jiabao mentioned in his Government Work Report released on 5 March 2011 that there are top 10 focus areas he needs to seriously deal with in 2011, and "Keeping Overall Prices Level Basically Stable" is his "number one" out of the top 10 focus areas.

Here are the details in his work report about curbing inflation:

Rising inflation and inflation expectation affect people's well-being and social stability. "Keeping Overall Prices Level Basically Stable" therefore has to be China's top priority in macroeconomic control. Chinese central government should strive to overcome the adverse effects of imported inflation and structural inflation by taking full advantage of fundamental conditions in China, such as ample supply of manufactured goods, abundant grain reserves and also considerable foreign exchange reserves. Government should also help to digest the upward pressure of production costs, lead market expectation to a correct direction, and insistently curb the trend of rising prices level. Prices level should be maintained mainly through economic and legal methods supplemented by administrative controls whenever necessary.

The following five key methods are to be used to curb inflation in 2011:

(1) Manage liquidity so as to control the monetary conditions that induce commodity prices level rising too rapidly. Remark: Up to this moment from the beginning of this year, People's Bank of China (PBoC) already announced to increase the reserve ratio on bank deposits for three times, each time by 0.5%, on 14 January, 18 February and 18 March 2011 respectively to a record high level of 20%. It was equivalent to freeze at least RMB 300 billion for each 0.5% reserve requirement ratio (RRR) hike in the China banking system. These reserve requirement ratio (RRR) hikes, together with the regular central bank note issuance, provide evidence to the market that PBoC is strictly following the plan of central government to mop up the excess liquidity in the monetary system which is the real source of inflation expectation.

(2) Develop production aggressively. Ensure sufficient production and supply of key agricultural products, daily necessities and important materials for production. Implement both the system of provincial governors taking responsibility for the "Rice Bag" (grain supply) program and also the system of city mayors taking responsibility for the "Vegetable Basket" (non-grain food supply) program.

(3) Strengthen the distribution system for agricultural products, encourage farmers and market stores to link up with each other, and ensure unimpeded transportation of fresh agricultural products through "Green Channels", where vehicles carrying such products are exempt from paying road tolls. Improve the reserve system for important commodities and also the system for temporarily purchasing and stockpiling key agricultural products.

(4) Enhance supervision of prices level and keep market in right order. Strengthen law enforcement for pricing, and seriously investigate to prevent illegal market behavior such as driving up prices through price collusion, price manipulation or market speculation.

(5) Avoid high commodity prices affecting normal living of low-income people. Improve the system of subsidies and establish an interactive mechanism to align social assistance and social security benefits with rising commodity prices.

In short, the above methods 1 and 4 are used to reduce overall demand while the methods 2 and 3 help to improve supply condition of the market. Though the method 5 is extremely useful for low-income people, it may end up to distort the market, by forcing people originally not affordable, to provide unsustainable supports to the high commodity prices.

In addition to the key methods to curb inflation, we will continue to go through Chinese premier's remaining 9 focus areas for 2011 with you in our coming article(s).

Related article(s):
China's 12th 5-Year Plan: Government Work Report Part I
Chinese Government Key Targets and Work Plan for 2011: Government Work Report Part II
More Interest Rate Hikes Against China Inflation in 2011
2011 China CPI target
Inflation Warning for China
No more loose Monetary Policy in China
Real Deposit Rate Exceeded -2% in China


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