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Economists: China unlikely to see runaway inflation
Updated: 2004-02-24 16:21

China's inflation rate is estimated to be around three percent in 2004, said Yao Jingyuan, spokesman and chief economist of China's National Bureau of Statistics (NBS).

Yao said that the country's inflation rate will stay at a healthy level and unlikely reach five percent as some international analysts forecast.

With bank credit expanding at an unprecedented speed and redundant capacity accumulating in certain sectors, the Chinese economy is diagnosed by some international analysts as on the threshold of becoming uncontrollable. Some fear that, in a bid to avoid runaway inflation, the government may brake hard by raising interest rates, sending shock waves through the global economy.

However, Dong Tao, the chief regional economist for non-Japan Asia at Credit Suisse First Boston (CSFB), said the overheating of China's economy is driven by investment in redundant capacity, rather than surging consumer demand as in the bubble and bust period of the US economy. Almost all types of consumer goods are experiencing overcapacity at the moment. Therefore, there is no way that galloping inflation will emerge as in the mid 1980s and mid 1990s, Tao said.

In the long term, China's economic growth had a solid base. The supply of cheap and reasonable trained labor was abundant. The capital supply was adequate as foreign direct investment (FDI) flowed in. The huge consumption market was enough to support many new growth areas, such as automobiles, housing and telecommunications. Tao said China's economy would retain the upward trend for longer than Western economies, which lack the positive factors in China.

Yao said China's economy was closely linked with the rest of the world as foreign trade now accounted for 60 percent of China's GDP. Since the global economy was still under the shadow of deflation, China was unlikely to see a steep rise in inflation.

In the fourth quarter of 2003, the CPI rose from 1.8 percent to 3.2 percent due to higher prices of foodstuffs. Yao said since grain output was expected to rise this year, the prices of foodstuffs would stabilize in the summer. In the first two months of 2004, the momentum of price hikes had slowed.

The CSFB economist said the inflationary pressure was reflected in the rapid growth of bank credit. The Chinese central bank had taken measures to lower the speed of credit in the fourth quarter of last year. However, he said the effectiveness of the measures was yet to be seen in the long term.

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