A 2.7-percent rise in consumer price index (CPI) alone may not
be enough to prompt policymakers to apply the brakes on prices. But
in view of the soaring trade surplus and a stronger-than-expected
growth in new loans, the monetary authorities would do well to keep
one foot on the brake.
After a brief dip from 2.8 percent in December to 2.2 percent in
January, China's headline CPI rebounded to a 2.7-percent rise
year-on-year last month.
The inflation figure in itself is benign since it remains within
the 3-percent target the People's Bank of China has set for this
year.
The average rate for the first two months which can iron out
calendar quirks caused by the timing of the Chinese New Year, which
fell in January last year but in February this year was even lower,
standing at about 2.5 percent.
Given that the main driving force behind the current CPI is
still the rise in food prices, one can expect inflation to remain
low as grain prices are unlikely to keep rising.
Both consecutive bumper harvests in recent years and the
long-term price level of grains leave little room for further rise
in prices.
However, China's latest credit figures and trade growth depict a
different economic outlook. Despite the authorities' warnings about
excess growth in credit, new loans that domestic banks granted in
the first two months of this year reached 982 billion yuan, up 37
percent year-on-year.
Given China's efforts to balance its trade growth, a huge
February trade surplus surprised almost everyone. The near-record
surplus of $23.8 billion was about 10 times the amount the previous
year.
Clearly, it will be a tough challenge for China to both rein in
credit growth to curb excessive investment and reduce the
ballooning trade imbalance this year.
Under such circumstances, the moderate rise in headline CPI also
demands close attention from policymakers. The market should brace
for further tightening measures if any sign of a spillover from
food prices to the broader price rise emerges.
(China Daily March 14, 2007)