Local Governments to Keep a Close Eye on Prices

飞雪寒冰

China's top economic planner said it has asked local authorities to keep a lid on prices of key goods in a move to control inflation in the run-up to Oct.1, the 60th anniversary of the People's Republic of China.

In an Aug. 27 online statement, the National Development and Reform Commission said that while consumer prices had been falling since the second half of 2008, rapid credit growth and soaring asset prices had boosted inflation expectations.

The NDRC said that because overall supply and demand are basically balanced and grain reserves are ample, consumer prices should not rise sharply across-the-board.
Still, the economic planner has asked local price authorities to closely monitor the market and take measures to curb any illegal price hikes.

Dong Anxian, chief macro economy analyst with Industrial Securities, said the NDRC statement aims to forestall price hike proposals by certain government departments.

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"There are currently strong expectations of inflation, and rising utility prices will further push up prices," he said. The government is expected to hike energy, water and gas prices as part of a reform of utility pricing structure, though no timetable has yet been set.

Wang Zhihao, research head of Standard Chartered Bank (China) Ltd., said the extent of upward pressure on prices is uncertain. However, domestic food prices, which make up the bulk of the consumer price index that gauges China's inflation, are rising faster than international prices, and inflation may emerge in the fourth quarter, he added.

The assessment matches that of a July central bank report, which forecast CPI will bottom out in the third quarter. People's Bank of China vice governor Su Ning said Aug. 7 that the central bank has no concerns over inflation in the near term.

Pork prices, a major component of CPI, rose 15.8 percent in the nine weeks ending mid-August, while egg prices increased 6.2 percent over the five weeks to the same date, according to the Ministry of Agriculture.

The consumer price index fell for the sixth consecutive month and by the largest margin this year in July, dropping 1.8 percent year-on-year, according to the National Bureau of Statistics. The index fell despite a 15 percent year-on-year rise in China's retail sales in the first half, and auto sales reaching a record 6.1 million units on the back of government tax breaks and subsidies.

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"The government may attempt to curb growth of M2, the broadest measure of money supply, to control inflation," Standard Chartered's Wang said.

In its 2008 annual report released Aug. 25, the central bank said that excessive growth in the money supply spurred by record new lending and persistently low benchmark interest rates in the first half will eventually result in price increases.

The PBOC restated its commitment to a full-year target of 17 percent M2 growth in the report, despite M2 being up 28.4 percent year-on-year at end-July after bank lending reached a record 7.4 trillion yuan in the first half.

The PBOC will use open market operations to manage liquidity in response to economic changes, especially the international balance of payments, the report added. The central bank has stepped up open market operations, most recently selling 50 billion yuan worth of one-year bills, and issuing repurchasing agreements worth 10 billion, on Aug. 25.

On July 30, a central bank official said China needs to fine-tune its moderately loose monetary policy in response to price developments and changes in the broader economy. This, along with a slew of regulatory measures designed to cut back credit growth, triggered a plunge in the benchmark Shanghai Composite Index, which lost almost 20 percent from its peak of 3,471 points at the turn of the month before it began to rebound Aug. 19.