To be continued, China’s battle against inflation

Posted on Apr 19, 2011 in Economic News
Although China’s central bank has intensified monetary tightening to check stubbornly high inflation, the measures may fall short of achieving the goal immediately due to fast-increasing domestic liquidity.

The People’s Bank of China (PBOC) announced on Sunday to raise the bank’s reserve requirement ratio (RRR) by 50 basis points starting April 21, making banks keep a record 20.5 percent of their deposits in reserve.

Since the beginning of this year, the central bank has sped up RRR hikes to once a month, as a part of the government’s anti-inflation drive which also included two interest rate hikes and an array of open market operations. Even so, the Consumer Price Index (CPI) hit a 32-month high of 5.4 percent in March.

On the sidelines of the Boao Forum for Asia in south China’s island province of Hainan Saturday, PBOC governor Zhou Xiaochuan said “China will continue to tighten monetary policy for some time,” adding that there is no absolute ceiling for the level of banks’reserve requirements.

However, such talk has not eased liquidity fears. Although the latest RRR hike will drain off 360 billion yuan, another 1,200 billion yuan of liquidity will be added to the market by the end of this month.

Lian Ping, an economist with the Bank of Communications, estimated that in April more than 900 billion yuan of central bank notes will come to maturity and more than 300 billion yuan of outstanding foreign exchange funds will also be added to the market.

Holiday factors, to some extent, distorted China’s trade figures in the first three months, giving rise to the nation’s first quarterly trade deficit in six years. As the holiday factors disappear in the second quarter, the deficit is expected to vanish, which will refresh pressure on the money supply, especially given that the nation’s trade surplus exceeded 3 trillion U.S. dollars by the end of March.

Xia Bin, a member of the monetary policy committee of China’s central bank, expected tightening measures to persist till the end of this year.

Higher bank rates are helpful in countering inflation, but hurt the nation’s often cash strapped mid-and-small-sized business.

The lending rate for a maturity period of at least five years has climbed to 6.8 percent.

Liu Guizhong, assistant of the president of the Galanz Enterprise Group Co. of Guangdong, a home appliance maker, said it seems to be getting more difficult to borrow from banks. For small enterprises, the door is pretty much shut, he added.

Chen Ying, an analyst with Guohai Securities, said small businesses will have to seek money from underground financing sources.

Sun Lijian, a financial professor with Fudan University, said some small enterprises may cut their budgets for manufacturing and put more money into investments for faster returns. But if the money is used to speculate on commodities, that may in turn push up inflation.

via To be continued, China’s battle against inflation – People’s Daily Online.