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China’s policy shift signals concerns about inflation

BEIJING – CHINA’S announcement that it will move to a tight monetary policy from what it called the prudent stance of the past decade may not mark a radical new departure.

But the change in rhetoric suggests the Chinese leadership wants to signal concern about living standards as people fret about inflation.

Analysts say the pronouncement on next year’s policy, from a top-level economic policy committee this week, points to a more intensive use of tools already in play, such as the stricter enforcement of banks’ lending quotas.

‘The official announcement of ‘monetary policy biased towards tightening’ is not really new news,’ Mr Frank Gong, JPMorgan’s chief China economist, said in a note. ‘The authorities have been trying to tighten the monetary environment throughout this year.’

Inflation in October matched an 11-year high at 6.5 per cent and analysts do not expect it to be much different when data for last month is published next week.

Rises in the consumer price index have come almost entirely from food. Some economists argue that since core inflation, which excludes food and energy, has held steady near 1 per cent, the broader economy is not threatened.

That may miss the point. ‘Inflation is still very narrowly confined to a small group of food items, but they’re highly visible,’ said Mr Arthur Kroeber of research firm Dragonomics. ‘Authorities want to be super cautious that they’re seen to be vigilant about inflation.’

The government said on Wednesday its two main economic policy goals for next year were to prevent the economy from overheating and to keep food price inflation from spreading to other sectors.

A string of officials and government think tanks have forecast that inflation will taper to about 4 per cent next year. But the central bank made clear in its third-quarter monetary policy statement that the country could be in trouble if inflationary expectations became entrenched.

The latest batch of data showed meat and poultry cost 38.3 per cent more in October than a year before, vegetables were up 29.9 per cent and food oil climbed 34 per cent.

That makes a serious dent in the average Chinese wallet.

 

Source: REUTERS (The Straits Times 8 Dec 07)

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