HONG KONG - The amount of money sloshing
around China's economy continued to grow in
January, suggesting the government will continue
tightening monetary policy to squeeze out excess
liquidity and curb inflation, even as the
country's farmers and industry battle to rebuild
after the worst snowstorms in 50 years.
The broadest measure of money supply, M2,
rose 18.9% from a year earlier to 41.78 trillion
yuan (US$5.8 trillion), compared with a 16.7%
increase in December, according to the People’s
Bank of China (PBoC) website. Financial
institutions granted a record 803.6 billion yuan
in new loans in January, 237.3 billion yuan more
than a year earlier. The outstanding value of the
loans jumped 16.7% year-on-year to 26.97 trillion
yuan at the end of January, the central bank said.
On Tuesday, China announced that the
mainland's consumer
price
index (CPI), the main measure of inflation, grew
7.1% in January year-on-year, overtaking the 6.9%
rise recorded in November as the highest monthly
level since December 1996, when CPI rose 7%.
Non-food price inflation inched up to 1.5%
year-on-year in January from 1.4% year-on-year in
December, and is set to pick up pace, analysts
said. The producers' price index (PPI), which
measures the cost of making industrial and
consumer goods, released on Monday, climbed 6.1%
year-on-year in January, faster than December's
5.4% increase and 3.1% in the full year 2006.
Inflation may pick up pace due to the
impact of last month's snowstorms and the surge in
producer prices. Jun Ma, Deutsche Bank's Greater
China chief economist, said that faced with
already increasing labor costs and international
energy and commodity prices, manufacturers will
soon be passing on price increases to consumers
around the world.
"Raw agriculture prices
went up substantially in January. It normally
takes one to two months for this pressure to pass
through to manufactured/processed food items. This
will also add pressure for inflation in February
and March,'' Ma said. "The broader cost push
factors, reflected in the three-year new high of
PPI inflation released [on Monday] as well as
possible hoarding behavior of consumers could
exacerbate the inflationary pressure. We believe
that macro and policy risks associated with
inflation will remain intense at least in the
coming two to three months."
The
snowstorms, which killed more than 107 people,
have cut food supplies and damaged transport
systems. The Ministry of Agriculture says 11.8
million hectares of crops have been affected by
the disaster. About 40% of planted rapeseed and
30% of vegetable fields were destroyed. That will
only add to the inflation rate.
"In our
view, the inflation impact from the snowstorms may
have not been fully reflected in the January
inflation data yet because the storm took place at
the end of the month and the periodical sampling
by the statistical authorities may not be able to
fully reflect the very rapid price changes
occurred during that period,'' Goldman Sachs
economists Yu Song and Hong Liang wrote in their
joint research notes. "Therefore, the February CPI
reading, which is scheduled to be released on
March 11, is likely to be much higher than 7%, and
might even get close to double-digit levels.''
Ha Jiming, chief economist at China
International Capital Corp, expected to see CPI
reach 8% this month.
Too early to
loosen Yu and Hong argued it is far too
early to expect any policy loosening in China. "To
the contrary, policymakers in China will likely
try to tighten monetary policy further, with more
reserve requirement ratio hikes [the percentage of
deposits that banks are required to hold as
central bank reserves], faster yuan appreciation,
and more heavy-handed controls over bank lending,"
they wrote.
JP Morgan Securities China
Equities chairman Jing Ulrich said China is
unlikely to ease its current tight monetary
measures until food supplies return to normal and
the threat of inflation is diminished.
The
record high growth in new bank loans and January’s
CPI, the worst in 11 years, have been cited as
factors supporting a tight monetary policy. Even
so, some economists believed the two sets of data
should be read separately and urged the government
to reverse the monetary policy to "steady" from
"tight".
BNP Paribas Asia chief China
economist Chen Xingdong said the macroeconomic
situation and the current inflation were not
closely related. The National Development and
Reform Commission (NDRC), the country’s top
economic planning body, said the current inflation
was structural, meaning it was caused by steep
rises in the cost of staple food items such as
pork, cooking oil and vegetables, Chen said. Food
prices, which account for about 30% of the CPI,
surged 18.2% in January, led by a 58.8% and 41.2%
year-on-year rise in pork and poultry prices.
Edible oil jumped 37.1% and grain 5.7%.
"However, I have a belief that the current
inflation is also caused by increasing costs. Now
almost all products are facing increasing costs,
including higher wages, soaring costs for energy
and industrial material. Apart from facing the
increasing costs in China, manufacturers
particularly exporters are hurt by a sharp rise in
the yuan against the US dollar, which has raised
the price of their goods abroad."
Time
to ease Given the pressures many medium-
and small-sized enterprises are facing, the
central government cannot do more on monetary
policy term, such as raising interest rates, and
the central government should shift its policy
from "tight" to "steady" in order to maintain a
steady economic growth, Chen said.
Since
January of last year, the PBoC has raised the
one-year deposit rate six times, from 2.52% to
4.14%, and increased the deposit reserve rate
eleven times to 15%, the highest for 20 years.
Ha Jiming echoed Chen's views, saying
Beijing should adopt "flexible tightening"
measures, including granting subsidies and loans
to boost agriculture while continuing to raise the
reserve requirement for banks and letting the yuan
appreciate faster.
"As the tight loan
policy has hurt the grain business, so the tight
loan supply should not be applied to all sectors
in society," he said.
However, economists
are divided over whether Beijing should raise
interest rates to curb the higher inflation.
Citigroup economist Shen Minggao expected the
central bank to raise the interest rate again in
the first quarter. "We still hold the view that
there could be one more rate rise in the first
quarter due to the widening gap between the
deposit rate and inflation," he said.
HSBC
executive director Peter Wong said the government
may roll out more economic cooling measures, but
further interest-rate hikes may do more harm than
good. "Further hikes will only broaden the gap
between the mainland interest rate and the
decreasing interest rates in the US, which will
add pressure for the yuan to appreciate, creating
hardship for many mainland companies."
After rising 7% against the US dollar last
year, the yuan has appreciated 1.9% so far this
year. Forward contracts show traders are betting
on a 9% advance to 6.58 in the next 12 months,
Bloomberg reports.
Increasing the required
deposit reserve ratio, which would serve to
restrain lending, may be a more appropriate way to
fight the higher inflation, he said.
Xu
Lei, an analyst at a Shanghai securities house,
said the higher inflation heightened concerns that
the central bank would further tighten monetary
policy through higher interest rates or in the
reserve requirement ratio, which would affect
market sentiment and frighten investors.
China and Hong Kong share prices closed
lower in the morning trade on Wednesday, driven by
mainland China financials.
The Shanghai
Composite Index closed less than 1% down at about
4,527 as bank share prices fell. Shanghai Pudong
Development Bank dropped almost 6% to 43.23 yuan
and China Merchants Bank declined by about 2.25%
to 32.2 yuan. The Hang Seng Index gave up early
gains to close 32.42 points up at about 23,623
after rising past the 24,000 mark in morning
trade.
Olivia Chung is a senior
Asia Times Online reporter.
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