A case for tight credit

(China Daily)
Updated: 2010-03-12 07:52
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The faster-than-expected rise in consumer prices in February should not make you panic over China's outlook on inflation. But still, the central bank must enact more tightening measures that could help cool the rise if the global recovery stalls in the future.

According to the National Bureau of Statistics, China's consumer price index rose 2.7 percent year on year last month, up from January's 1.5 percent rise. For those taking a hawkish view against inflation, the recent climb of consumer inflation to a 16-month high must be worrisome, though it is still below the 3-percent inflation ceiling the government has set for this year.

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As the country's wholesale inflation accelerated to 5.4 percent, up from January's 4.3 percent, it is reasonable to predict more subsequent retail price hikes.

The spike in inflation over the past four months demands attention from policymakers.

The rising consumer inflation has turned the interest rate for deposits negative and considerably added to the urgency for the central bank to rein in cheap credit. The pace in credit loans has slowed in China. Loan growth fell to 700 billion yuan in February from 1.39 trillion yuan in January. But the tightening will not end the excess of liquidity fast enough.

Compared with the risk of runaway consumer inflation, the danger of asset bubbles fueled by cheap credit looks far more imminent. And now, a negative interest rate makes the case even worse. Under such circumstances, the monetary authorities should raise borrowing costs quickly.

(China Daily 03/12/2010 page9)