Opinion

Inflation zone

(China Daily)
Updated: 2009-12-12 07:26

All indications are that the Chinese economy has rapidly managed to sidestep deflation with a 0.6-percent year-on-year increase in consumer prices recorded last month. The inch up comes amid a gradual V-shaped recovery from the worst global recession in decades.

In February, China registered its first dip in six years in the consumer price index (CPI). Soon, there was skepticism whether the country would achieve the 8-percent growth target for the year.

With yesterday's economic numbers reflecting accelerated growth, few will entertain any such doubt.

China's GDP has increased from 6.1 percent in the first quarter of the year - the slowest in nearly a decade - to 7.9 percent in the second and 8.9 percent in the third.

And, it is believed that the combination of a 9.8-percent increase in trade - ending a 12-month decline - and strong retail sales and fixed-asset investment seen last month will ensure double-digit growth in the fourth quarter.

The country's imports and exports rose 9.8 percent in November year on year to stand at $208.2 billion. And the trade surplus was $177.96 billion in the Jan-Nov period, down 30.6 percent from a year earlier.

The urban fixed-asset investment rose 32.1 percent year on year in the first 11 months to 16.86 trillion yuan ($2.47 trillion), or 5.3 percentage points higher than the year earlier. Meanwhile, the retail sales rose 15.8 percent year on year to 1.13 trillion yuan in November, but 5 percentage points lower than that of a year earlier.

The first monthly rise in the CPI since January certainly comes as a relief to policymakers who have been working hard to prevent deflationary forces from taking root.

The return of inflation, however mild, requires that policymakers be as vigilant as possible.

The low-growth prospects of the world economy mean international inflationary pressure may remain subdued for a while.

So, even if it tempts some debt-laden countries to "inflate" their way out of the crisis, the domestic situation is just not the same.

Food prices, which make up for a third of the CPI basket, rose 3.2 percent in November from a year earlier. The higher rates are already impacting Chinese households, and there is little sign the increase will be capped any time soon.

Planned price hikes for energy and utilities may be necessary to promote energy conservation and sustainable development - but they will sustain inflationary pressure next year.

Yet, the bigger threat is from the ongoing credit boom, which has the potential to fuel asset bubbles. This will dramatically increase the rate of inflation.

The new yuan-denominated lending in November rebounded slightly to 294.8 billion yuan from October's 253 billion yuan.

It is risky for China to start tightening policy too soon, given the uncertain global economy. Yet, the inflation trigger allows for no slow response.