Measures urged to manage inflationary expectations

Updated: 2011-06-27 09:11
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BEIJING -- As China tightens monetary policies to rein in liquidity and curb inflation, experts gathering at the Second Global Think Tank Summit Sunday urged the Chinese government to adopt measures to control the long-term market supply and demand to manage inflationary expectations.

While regulating food and property markets that caused price increases, the government should introduce effective measures to guard against the rising long-term inflationary expectation fueled by short-term price hikes, said Lawrence Lau, Chairman of CIC international (Hong Kong) Co Ltd.

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China' s CPI accelerated to a 34-month-high of 5.5 percent in May, up from 5.3 percent in April and far above the government's annual target of 4 percent.

Experts expected the CPI to hit 6 percent in June.

To ease soaring prices, the People's Bank of China, or the central bank, has raised interest rates twice this year and hiked the reserve requirement ratio (RRR) for banks six times.

According to Lau, the high CPI was mainly caused by rising costs of farm produce, food and rent. But the country's core inflation, an index excluding price changes in sectors such as farm produce and energy, is rather low at around 1.5 percent.

"But sectors including steel, cement and glass still undergo oversupplies," Lau said.

Xiao Geng, director of Columbia Global Center for East Asia, shared his views and said that the country' s economic conditions don't support a rising inflation.

"China actually has no financial deficit so there is no need to print money to inflate the economy. Its total demand is also smaller than the total supply," Xiao said.

Meanwhile, Lau warned of potential risks deriving from rising prices in non-agricultural sectors such as the red-hot property market and urged the government to stabilize the long-term supply and demand in those sectors.

"Both traditional measures and price control could not effectively mitigate the inflation. We could adopt policies to affect the long-term market demand and supply to change the inflation expectation," Lau said.

Lau suggested that the government should adopt measures including using state reserves to stabilize food prices, imposing taxes in the energy sector to affect the long-term expectation, and introducing financial tools such as inflation-protected bonds and fixed deposit to help the public hedge against inflation.

"These will show the government's determination to control inflation, which will help ease the public's inflation expectations," Lau said.

Despite the country's efforts to contain the level of inflation, the world's second largest economy still maintains a negative interest rate. Xiao said the negative interest rate will lead to distorting assets prices and the redistribution of wealth which indirectly gives the rich the advantage to profit from average people's deposits through investment.

"What we urgently need is higher interest rates. We can use more fiscal investment to offset the negative effect of a shrinking economy caused by interest rate hikes," Xiao said.

However, Wang Jian, a professor with the Chinese Academy of Governance, expressed his worries that more interest rate hikes and a stronger RMB, or the yuan, will increase the pressure of a rapidly-growing foreign reserve for the country as developed countries maintain nearly zero interest rates.

The yuan has gained 5.5 percent over the past year since the country's central bank announced on June 19, 2010 to further reform its exchange rate formation mechanism to add more flexibility.

According to Lau, interest rate hikes underscored the central government's determination to control the rising inflation, but also will draw hot money to the country.

"If the negative interest rate continues, the banking sector's role will become weak as money flies out. One solution is to raise the interest rate for long-term deposits while leaving the lending rate unchanged since the two interest rates still have room for adjustment," Lau suggested.

Warning that the overly tight money policy may rupture the capital chain for small enterprises, Peking University professor Li Yining urged the government to take caution of both inflation and the vice verse, stagflation.

As inflation expectation and the expectation for corporate profitability prospects are two important economic indicators, the government should pay equal importance to both expectations when taking measures to contain money supply, Li said.