All eyes on CPI to gauge future monetary moves
By Sun Lijian (China Daily)Updated: 2007-06-27 09:49
The consumer price index (CPI) last month attracted wide public and government attention.
Its growth of 3.4 percent, though a record high for two years, and the third monthly rise in a row of over 3 percent, was still within market expectations.
The unusual interest was due to several factors.
The market, especially the securities market, is trying to figure out future moves by the monetary authorities, and the CPI, the key indicator of inflation, is obviously an important factor in any decision.
The government may also be under pressure. The CPI in rural areas is climbing more quickly than in the cities. With the rural population lagging far behind their urban cousins in disposable income, the more dramatic growth in the prices of necessities may further lower the living standard of the rural population.
Admittedly, the current CPI growth is primarily driven by the rise in prices of pork and grain. However, there is a possibility prices of more commodities could be pushed upward, signaling runaway inflation.
With the banking sector controlling the majority of the country's financial assets, the difference between the inflation rate and the interest rate is a decisive factor in money flows between banks and the capital market. When the CPI growth is close to the interest rate, more people could move their savings from deposit accounts to securities.
The already excessive liquidity troubling the economy would be even harder to contain.
Under such circumstances, it is only natural for authorities to tighten the monetary policy. With higher interest rates and deposit reserve requirements, the central bank has quite a few tools at its disposal.
Given the time gap between launching a tightening policy and it effects on the economy, the earlier it is launched the more effective it will be.
However, tightening the monetary policy could cost China a lot more than it
would other countries because of China's heavy reliance on foreign trade and foreign direct investment.
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