Balancing act needed on inflation

By Wang Xu (Xinhua)
Updated: 2008-04-17 07:34

While latest economic figures are pointing to a slowdown, growing "external uncertainties" have prompted the country's policymakers to take a more cautious approach in their battle against inflation, officials and analysts said Wednesday.

A consumer selects cooking oil in a supermarket in Suzhou, Jiangsu Province. The government is continuing with steps to help people deal with rising food prices. [China Daily]

"Now, we not only have to prevent a sharp downturn of the economy, but also a rebound in investment," said Li Xiaochao, spokesperson for the National Bureau of Statistics.

Over the past half a year, policymakers have named inflation and overheating as their top concern, using tightening measures to cool the economy and curb inflation. But with the outbreak of the subprime crisis in the United States, an increasing number of analysts are sounding warning bells for a sudden economic downturn, largely due to weak export demand in the US.

"In the short term, they will probably want to continue the tightening measures," said Yiping Huang with Citigroup in Hong Kong.

"But I suspect that within several months, the growth risks might overtake the inflation risks."

The authorities are seeking to balance economic growth with controlling inflation amid latest economic developments, the State Council said yesterday.

"We need to closely watch the latest development of the economic situation, and strike a balance between promoting economic growth and curbing inflation," said the statement from a State Council conference, which was chaired by Premier Wen Jiabao.

The world's fourth-largest economy grew by 10.6 percent in the first three months from a year earlier, down from 11.2 percent of the fourth quarter last year. Most analysts say weakening export demand triggered by the subprime crisis was a key cooling factor.

China's exports grew 21.4 percent in the first quarter, down 6.4 percentage points from the same period last year. The export slowdown came as the US, which accounts for 23 percent of China's exports, is on the verge of a recession and may slash its order for Chinese products.

"We are far from seeing the full impact of the subprime crisis," said Li. "External demand is likely to shrink further."

If the US economy falls into a deep recession and China's exports growth to the nation ends up in negative territory, the nation's will have to "sacrifice" one percentage point in economic growth, said Fan Gang, an advisor to the central bank's monetary policy committee, in a forum held earlier this month.

"The situation we face is quite complex now, with all the external uncertainties," said Fan.

But analysts said soaring consumer prices is still the primary concern for policymakers for the time being, as rising costs of materials and labor are expected to push inflation even higher in the coming months.

The country's inflation hit an 11-year high of 8.7 percent in February and dipped slightly to 8.3 percent last month. This presents a difficult task for the government to achieve a full-year inflation target of 4.8 percent, analysts said.

"Inflation remains the top issue facing the government, as it has a direct impact on people's purchasing power," said Sun Mingchun, an economist with Lehman Brothers.

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