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Economist: Economic slowdown remedy for rising inflation

(Xinhua)
Updated: 2008-06-08 09:17

A slowdown in the national economic growth would serve to relieve the inflationary pressure in the short term, a Chinese economist recently said at an industrial forum.

The country's rising inflation, which had become a pressing problem for decision makers, was caused by three factors: excess liquidity, the speculation of global investors on large commodities and robust demands, said Xu Xiaonian, a professor of economics and finance at the Shanghai-based China Europe International Business School, which trains professional managers.

Global excessive liquidity can be traced back to the monetary policies in the United States, said Xu, who previously worked as a senior economist with Merrill Lynch Asia Pacific and as a World Bank consultant.

He believed the Chinese government was left with only one choice to dampen the demand as it could neither influence US policies nor monitor money flows on the international market.

Domestic inflation was mostly a result of sharp increases in international prices of large commodities such as crude, grain and iron ore, Xu said.

He added China had played a role in driving prices up. In addition, the country was also a victim of the skyrocketing inflation as it imported goods at higher prices.

He said emerging economies, including China, had tipped the previous demand-supply balance on the international market, something which led to the price rises. He cited that the country had imported 150,000 tons of crude last year.

"Prices are unlikely to fall to the previous level, despite the role of speculative capital, if high growth was maintained with China and other emerging economies as global suppliers believed demands could buoy up prices," he explained.

In the short run, only a slowdown in growth, which at the same time means less demand, would help relieve the inflationary pressure, he said.

China's consumer price index (CPI), a main inflation indicator, had continued to rise since the second half of last year and showed no signs of abating.

The CPI jumped 8.5 percent in April, up from 8.3 percent in March and near the 12-year high of 8.7 percent in February.

Xu said the country should gradually shift its reliance on manufacturing to reducing consumption of resources in a bid to make the economy more risk free in the long run.

Otherwise, China would probably have to pay very high prices for those resources in future, he warned.

The country needed to relax its grip on and support the service industry to achieve the end, he said.