A 2.7-percent rise in consumer price index (CPI) alone may not be enough to prompt policymakers to apply
the brakes on prices. But in view of the soaring trade surplus and a
stronger-than-expected growth in new loans, the monetary authorities would do
well to keep one foot on the brake.
After a brief dip from 2.8 percent in
December to 2.2 percent in January, China's headline CPI rebounded to a
2.7-percent rise year-on-year last month.
The inflation figure in itself
is benign since it remains within the 3-percent target the People's Bank of
China has set for this year.
The average rate for the first two months
which can iron out calendar quirks caused by the timing of the Chinese New Year,
which fell in January last year but in February this year was even lower,
standing at about 2.5 percent.
Given that the main driving force behind
the current CPI is still the rise in food prices, one can expect inflation to
remain low as grain prices are unlikely to keep rising.
Both consecutive
bumper harvests in recent years and the long-term price level of grains leave
little room for further rise in prices.
However, China's latest credit
figures and trade growth depict a different economic outlook. Despite the
authorities' warnings about excess growth in credit, new loans that domestic
banks granted in the first two months of this year reached 982 billion yuan, up
37 percent year-on-year.
Given China's efforts to balance its trade
growth, a huge February trade surplus surprised almost everyone. The near-record
surplus of $23.8 billion was about 10 times the amount the previous
year.
Clearly, it will be a tough challenge for China to both rein in
credit growth to curb excessive investment and reduce the ballooning trade
imbalance this year.
Under such circumstances, the moderate rise in
headline CPI also demands close attention from policymakers. The market should
brace for further tightening measures if any sign of a spillover from food
prices to the broader price rise emerges.
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