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China balances growth and inflation

(Xinhua)
Updated: 2008-10-02 16:00

CURB INFLATION

With the tightening monetary policy, a core of macro-control measures, rising prices that loomed over the Chinese economy had slackened somewhat. The country's consumer price index (CPI), a main gauge of inflation, eased to 6.3 percent in July from 7.1 percent in June, 7.7 percent in May and a peak of 8.7 percent in February this year.

Over the past 30 years, China had experienced four major periods of inflation and one serious period of deflation. The highest CPI rise was 24.1 percent in 1994. The country's CPI had signaled a "yellow light" or cautionary period for nine months since September 2007, indicating lingering inflationary pressure.

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All of past major inflations were triggered mainly by domestic factors only. But this time, most experts believed, the inflation was ignited by external factors and was cost-driven.

Price increases for oil and farm produce worldwide would likely continue and shore up China's inflation, as the reliance of the country's economy on the outside world was now more than 60 percent due to its 30 year opening-up period.

Meanwhile, agricultural product prices at home, which were buoyed by short supplies after the severe winter weather and the Sichuan earthquake, would linger at a high level.

The rapidly expanding foreign exchange reserves, which pushed up the central bank's passive money supply, would add to the inflationary pressure.

China's forex reserves, already the world's largest, stood at US$1.81 trillion through June. This included a US$280.6 US billion increase in the past six months, an average monthly increment of US$46.8 billion.

Observers, however, warned of an influx of huge short-term speculative funds as the fast expansion was achieved in tandem with a slowdown in trade surplus growth.

The government was focusing on using tightening policies to fight inflation. To date, China had increased interest rates six times and the reserve requirement ratio 14 times since last year.

To ensure a steady and fast economic development, the PBOC says it would seek a balance between fighting inflation and boosting economic growth for the rest of the year.

Meanwhile, the central bank would make small changes to its monetary policy at a proper time in the second half, responding to the domestic challenges and uncertainties in the global economy.

The central bank would encourage financial institutions to increase credit supply to key industries and weak links, especially to small enterprises, and those concerning agriculture, farmers and rural areas.

It also urges tightened supervision on foreign exchange flows to prevent the risk of large amount of outflows.

In July, the State Administration of Foreign Exchange (SAFE) created a new system that enabled real-time monitoring of foreign exchange flows. The system is mainly an Internet-based data exchange mechanism among SAFE, banks, enterprises and accounting firms.

Economic planners would also exert themselves to increase supplies of necessities, closely track key prices and make price controls more effective, says Zhu Zhixin of the SDRC, the industrial watchdog.

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