China bent on taming inflation despite growth

likened inflation to a wild animal.
“Inflation is like a tiger. Once you let it out, it’s very hard to cage again,” he said solemnly.
Months later, prices in China are far from tamed despite a flurry of policy tightening measures which have caused the turbo-charged economy to slow, alarming global investors.
Higher interest rates and tighter credit have hurt many small businesses, sparking calls for Beijing to end its anti-inflation campaign or even ease policy to spur growth.
But Chinese leaders see a gradual moderation in growth in a positive light, which could spur much-needed structural changes to improve efficiency and rein in over-investment following an unprecedented credit surge in the past two years, analysts say.
Inflation, meanwhile, looks to be entrenched, driven by a worsening drought and power shortages, and the central bank is expected to push up interest rates and bank reserve requirements further in a bid to get prices under control.
“There is no room for the government to relax policy. Both interest rates and bank reserve ratios are likely to rise,” said Lu Zhengwei, senior economist at Industrial Bank in Shanghai.
HSBC’s flash PMI eased to 51,1 in May, the lowest since July 2010, adding to evidence the world’s second-largest economy is moderating due to the double whammy of credit curbs and power shortages.
But inflation in May is widely expected to accelerate from 5,3 percent in April, which was near 32-month highs.
That would push real interest rates deeper into negative territory, given the one-year bank deposit rate is now at 3,25 percent, and prompt more Chinese to put their money into property rather than bank deposits.
“Despite a slowdown in industrial production, inflation still remains a key problem, alongside an asset price bubble. China should continue with its tightening bias, though it would have to tread carefully with the mix of policy measures,” said Connie Tse, an economist at Forecast in Singapore.
Lu at Industrial Bank has pencilled in two or three interest rate rises by the end of this year, lifting the benchmark deposit rate to 3,75-4 percent. He also expects four more increases in banks’ required reserves by the year-end, taking the level to 23 percent.
Economists differ on how aggressive the central bank may be in steering policy in coming months due to global and domestic economic uncertainties, but most agree that it’s too early for the government to declare victory over inflation. Any rush to take the foot off credit brakes could lead to more vicious price rises over the longer term and more over-investment, already evident by empty airports, colossal new government buildings and ghost towns of new buildings with no occupants.
The People’s Bank of China has raised bank reserve requirements – its preferred tool to mop up excessive cash in the economy – eight times and raised interest rates four times since October.
The government has ordered banks to cut lending to the red-hot property sector and local government financing vehicles.
Over the longer term, Chinese leaders face an uphill battle against inflation as wages and raw material costs rise. The root cause of price pressures – too much cash sloshing around in the economy – will persist due to capital inflows and the hangover from the government’s record economic stimulus during the global financial crisis.
Wang Jun, an economist at CCIEE, a government think-tank, said he now expected inflation to peak in the third quarter, rather than in June as he earlier predicted, due to soaring food costs driven up by the worsening drought in central China.
“Inflation looks to be far more stubborn than we initially thought,” he said.
Tang Jianwei, an economist at Bank of Communications, predicted food prices rose 0,3-0.8 percent in May from April, pushing up inflation to 5,5 percent in the year to May.
Food costs, which make up 30 percent of China,s CPI basket, have been a key driver of price rises in recent months.
China’s worst power crunch in seven years is also adding to inflationary pressures, even as it threatens to slow the economy further. – Reuters.