(WSJ) Inflationary pressures from abroad and at home are likely on the rise in China as the economy recovers, the central bank said, in its first direct reference to the risk of higher prices since the global financial crisis hit.
But the People’s Bank of China signaled no reversal of its moderately loose monetary policy stance, aimed at spurring growth in the world’s third-biggest economy.
The comments on Tuesday were the bank’s clearest read this year on the prospects for inflation after China’s economic growth accelerated in the second quarter. The bank said the consumer-price index, its key inflation gauge, is likely to bottom out at the end of the third quarter.
Inflationary worries and possible asset bubbles have been flagged in recent weeks by policy makers since lending exploded, with new yuan loans in the first half of the year totaling 7.4 trillion yuan ($1.08 trillion), equivalent to about half of the country’s gross domestic product in the period.
The loan growth has spurred calls by economists for the central bank to fine-tune its loose policies. The PBOC cited “imported inflation,” where domestic prices are pushed up by higher prices of imported raw materials, as another factor that could add to price pressures in China. After falling 1.1% in the first half of 2009, the CPI will stabilize in the second half and possibly rebound, the bank said.
“Commodity markets around the world have bottomed and are rebounding, raising imported inflation pressures,” the PBOC said in a report analyzing second-quarter economic trends, issued by its Financial Survey and Statistics Department. “At the same time, domestic demand continues to rebound, liquidity remains flush and inflation expectations are surfacing.”
China’s producer-price index, which can be a leading indicator for CPI, is affected by the movements of international commodity prices. During China’s last inflationary cycle, when CPI peaked around the first half of 2008, the central bank began to gently nudge the yuan higher partly to offset imported inflationary pressures.
At the same time, in a move that could temper any upward pricing pressures, China’s economic planning agency Tuesday cut fuel prices around 3%, in its fifth adjustment this year. The cuts, which followed on the heels of three price increases, take effect Wednesday.
The state-run Xinhua news agency reported Tuesday that Chinese President Hu Jintao said China “must guarantee macroeconomics policies are sustainable and stable.”
But with Chinese exports still declining amid global recession, uncertainties about the sustainability of the current economic rebound and growing worries of speculative inflows returning to the country, analysts said the central bank is unlikely to change to its stance for a basically stable yuan for the foreseeable future.
“Commodity markets around the world have bottomed and are rebounding, raising imported inflation pressures,” the bank said, in a report analyzing second quarter economic trends issued by its Financial Survey and Statistics Department. “At the same time, domestic demand continues to rebound, liquidity remains flush and inflation expectations are surfacing.”