Opinion

Inflation battle not over

(China Daily)
Updated: 2011-04-16 16:09

With China's economy growing by almost double digits in the first quarter of the year, the country seems well set to cross its 8 percent growth target for 2011. This is certainly welcome news for the world economy that has come to depend on the robust growth of major emerging and developing economies to sustain its recovery.

But for Chinese policymakers busy with fighting inflation, the country's turbo-charged first-quarter economic growth is not exciting news. Latest data show that China's GDP increased by 9.7 percent in the first quarter and inflation jumped to a 32-month high of 5.4 percent in March.

For the rest of the world, however, China's strong first-quarter growth should be cause for joy because it not only provides a key source of growth while industrialized economies may only register marginal growth, but also pushes China's rebalancing act forward.

The January-March trade deficit of $1.02 billion, the first quarterly deficit in six years, indicates that China has reduced its reliance on exports to maintain a sound growth momentum.

It is widely believed that China's success in boosting domestic consumption will be crucial to its sustainable growth as well as to placing the global economy on a more stable footing. And that seems to be happening, because consumption contributed 5.9 percentage points to the first-quarter growth, while investment added 4.3 percentage points.

Yet faster-than-expected domestic growth is adding to policymakers' difficulty of taming inflation, which has been driven by food and commodity prices to rise above the government's target of 4 percent for the third straight month.

The authorities have tightened the monetary policy considerably to control price rise. To mop up the excessive liquidity that has been fueling inflation, the People's Bank of China, the central bank, raised the interest rate on April 5, the second time this year, after having increased the reserve requirement ratio for commercial banks nine times since the beginning of last year.

Related readings:  March PPI growth advances to 30-month high  China's consumer inflation hits 32-month high  Chinese economy expands 9.7% in Q1

Inflation rose in March more because of a lower base of comparison and less because of higher global oil prices, which increased China's import bill and inflated consumption in price terms.

Therefore, it is necessary to carefully gauge the "lagging effects" of the adopted tightening monetary policy to prevent the economy from being harmed.

If, as expected, inflation begins to level off in the coming months, the central bank may have to pause, if not end, its tightening mechanism. According to the month-on-month data, released by the National Bureau of Statistics for the first time, consumer prices slid 0.2 percent from February to March.

Nevertheless, it looks more than likely that the uncertainties plaguing the global economy and accelerating income growth in China will increase inflationary pressure, something that policymakers are yet to cope with.

So it is still too early to breathe a sigh of relief in the battle against inflation.