Home » Opinion » Foreign Views
China's take on inflation: Raise reserve ratios
By Sean Maguire |
January 13, 2011, Thursday
|
Print Edition
Print Edition
DOMESTIC and international concern is growing as China confronts the looming spectre of inflation.
Consumer prices jumped 5.1 per cent at the end of last year, its fastest increase in two years, well above the government's target of 3 per cent.
Increasing prices inevitably hits the poorest with the most force: food prices rose 11.7 per cent in November from the previous year and a basket of domestic expenses, including utilities such as gas, electricity and water leaped 5.8 per cent.
One of the principal factors propelling the Consumer Price Index skywards at the end of 2010 was bad weather, causing a decrease in fresh fruit and vegetable supplies. The result was that food prices accounted for the 74 per cent of the 5.1 per cent year-on-year CPI rise at the end of last year.
Fresh fruit and vegetable costs accounted for almost 25 per cent of all China's inflation in November.
Although these figures are significant, it should be remembered that they represent a temporary inflationary driver, and one that was not necessarily a bad thing for farmers.
Utility costs, on the other hand, accounted for only 7 per cent of the CPI rise last month, reflecting Beijing's confidence that with rising wages, China's householders are able to withstand this transfer of energy costs.
There is a distinct sense of scare mongering, however, among some China watchers, many of whom have been waiting in the wings excitedly, hopping from one foot to the other at the slightest signal that the China economy may stumble.
Nonetheless, inflation is an issue that has ignited policy makers and despite real sensitivity to the problem, they continue to skirt around orthodox responses to it and remain conspicuously reluctant to deploy meaningful interest rate hikes, the standard tool used by central bankers to exert control over inflation.
Speculative capital
Higher returns on deposits and loans would encourage speculative capital inflows that would exert pressure on exchange rates. The influx of foreign capital is driving asset price pressures as developed economies, flush with cash from repeated bouts of quantitative easing, look to China's continued growth and the prospect of interest rate hikes and a stronger yuan, as a safe home for their investments.
Low global interest rates have exacerbated this risk and banking officials are wary of importing inflationary forces. The central government has made it clear that allowing the yuan to appreciate is not an option; there is still real concern among policy makers about the competitiveness of their exports amid a thin and fragile global recovery.
Another major consideration is the inevitable fall-out from the massive fiscal stimulus package witnessed in China over the past couple of years.
Many local governments and domestic companies are carrying significant levels of debt and any increase in the interest burden on borrowers may exacerbate the problem of non-performing loans.
During China's last inflationary cycle, the government tackled the issue aggressively, raising interest rates eight times by a total of 189 basis points over a 21-month period from April 2006 to December 2007. Nevertheless, inflation continued to rise, peaking in February 2008 at 8.7 per cent.
More recently, the Chinese government has erred towards the use of increasing bank reserve requirement ratios to quell inflation, rather than raising interest rates, in the ongoing battle to stabilize price increases.
Increasing the bank's Reserve Requirement Ratio (RRR) - the amount of money that a bank is required to hold on to in reserve against deposits made by customers - drains money from the financial system, thus mopping up excess liquidity. This is the tool of choice for government officials, with six increases in the RRR in 2010, the last being a increase to 19 per cent for the bigger banks.
Expect further increases during the first quarter of this year with the RRR reaching 23 per cent before 2012 as policy makers attempt to institute a more balanced approach to growth in advance of this year's 5 Year Plan.
(The author is Of Counsel at Allbright Law Offices. He can be reached at sbmaguire@allbrightlaw.com. Shanghai Daily condensed the article.)
Consumer prices jumped 5.1 per cent at the end of last year, its fastest increase in two years, well above the government's target of 3 per cent.
Increasing prices inevitably hits the poorest with the most force: food prices rose 11.7 per cent in November from the previous year and a basket of domestic expenses, including utilities such as gas, electricity and water leaped 5.8 per cent.
One of the principal factors propelling the Consumer Price Index skywards at the end of 2010 was bad weather, causing a decrease in fresh fruit and vegetable supplies. The result was that food prices accounted for the 74 per cent of the 5.1 per cent year-on-year CPI rise at the end of last year.
Fresh fruit and vegetable costs accounted for almost 25 per cent of all China's inflation in November.
Although these figures are significant, it should be remembered that they represent a temporary inflationary driver, and one that was not necessarily a bad thing for farmers.
Utility costs, on the other hand, accounted for only 7 per cent of the CPI rise last month, reflecting Beijing's confidence that with rising wages, China's householders are able to withstand this transfer of energy costs.
There is a distinct sense of scare mongering, however, among some China watchers, many of whom have been waiting in the wings excitedly, hopping from one foot to the other at the slightest signal that the China economy may stumble.
Nonetheless, inflation is an issue that has ignited policy makers and despite real sensitivity to the problem, they continue to skirt around orthodox responses to it and remain conspicuously reluctant to deploy meaningful interest rate hikes, the standard tool used by central bankers to exert control over inflation.
Speculative capital
Higher returns on deposits and loans would encourage speculative capital inflows that would exert pressure on exchange rates. The influx of foreign capital is driving asset price pressures as developed economies, flush with cash from repeated bouts of quantitative easing, look to China's continued growth and the prospect of interest rate hikes and a stronger yuan, as a safe home for their investments.
Low global interest rates have exacerbated this risk and banking officials are wary of importing inflationary forces. The central government has made it clear that allowing the yuan to appreciate is not an option; there is still real concern among policy makers about the competitiveness of their exports amid a thin and fragile global recovery.
Another major consideration is the inevitable fall-out from the massive fiscal stimulus package witnessed in China over the past couple of years.
Many local governments and domestic companies are carrying significant levels of debt and any increase in the interest burden on borrowers may exacerbate the problem of non-performing loans.
During China's last inflationary cycle, the government tackled the issue aggressively, raising interest rates eight times by a total of 189 basis points over a 21-month period from April 2006 to December 2007. Nevertheless, inflation continued to rise, peaking in February 2008 at 8.7 per cent.
More recently, the Chinese government has erred towards the use of increasing bank reserve requirement ratios to quell inflation, rather than raising interest rates, in the ongoing battle to stabilize price increases.
Increasing the bank's Reserve Requirement Ratio (RRR) - the amount of money that a bank is required to hold on to in reserve against deposits made by customers - drains money from the financial system, thus mopping up excess liquidity. This is the tool of choice for government officials, with six increases in the RRR in 2010, the last being a increase to 19 per cent for the bigger banks.
Expect further increases during the first quarter of this year with the RRR reaching 23 per cent before 2012 as policy makers attempt to institute a more balanced approach to growth in advance of this year's 5 Year Plan.
(The author is Of Counsel at Allbright Law Offices. He can be reached at sbmaguire@allbrightlaw.com. Shanghai Daily condensed the article.)
- About Us
- |
- Terms of Use
- |
-
RSS - |
- Privacy Policy
- |
- Contact Us
- |
- Shanghai Call Center: 962288
- |
- Tip-off hotline: 52920043
- 沪ICP证：沪ICP备05050403号-1
- |
- 互联网新闻信息服务许可证：31120180004
- |
- 网络视听许可证：0909346
- |
- 广播电视节目制作许可证：沪字第354号
- |
- 增值电信业务经营许可证：沪B2-20120012
Copyright © 1999- Shanghai Daily. All rights reserved.Preferably viewed with Internet Explorer 8 or newer browsers.
