Economy

More measures to curb inflation, say economists

By Zhou Yan (China Daily)
Updated: 2010-11-19 10:42

SHANGHAI - Leading economists have forecast more measures are needed to tame inflation, in addition to interest hikes.

Zhou Qiren, an adviser to the People's Bank of China and professor at Peking University, was quoted by the China Securities Journal as saying individuals and companies should be provided with more investment channels both at home and abroad to reduce excessive domestic liquidity. The government should inject more supplies into the market to cool down prices.

The State Council, also known as the cabinet, announced on Wednesday that it is formulating a slew of measures, including boosting food supplies and other necessities, to contain ballooning commodity prices due to growing worries about inflation.

"We believe the execution of these measures will be quick and uncompromising with six to seven detailed policies," said Jing Ulrich, chairwoman of China equities and commodities with JPMorgan.

She said China's stocks will likely rise by 20 percent to stand at 3,600 points by the end of 2011, riding on affluent liquidity and strong corporate earnings amid China's continuing economic expansion.

Ulrich said on Thursday that it is a conservative projection and was estimated on condition that the market's average price/earnings ratio will keep flat to 16.4 times next year. It still has scope to increase.

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"Buoyed by China's robust economic growth, corporate earnings are expected to advance by 21 percent while the US quantitative easing (QE) will inject more liquidity into Chinese stock market," she said, predicting that China's gross domestic product will rise by 10 percent this year, and slightly slow to 9 percent as the trade surplus narrows.

After rallying by 35.7 percent since early July, the benchmark Shanghai Composite Index has cumulatively plunged by almost 9 percent in the latest five trading days on government curbs on liquidity to rein in inflation and asset bubbles. It edged up 0.94 percent to end at 2865.45 on Thursday.

The consumer price index (CPI), a major gauge of inflation, rose 4.4 percent year-on-year in October to a 25-month high.

The stronger-than-expected CPI has sparked broad market speculation that the central bank will spring another rate hike by the end of the year, following a surprise increase of 25 basis points on Oct 19.

"The large pickup in inflation and a rebound in money growth suggest that tightening has not reached the desired effect," said Ken Peng, an economist at Citigroup Inc.

"China's rate increase move has lagged behind a large number of economies," Ulrich said.

"We believe that China has started entering into the trajectory of rate increase, and may lift the interest rates again before the end of this year," she added.

Ulrich estimated that China will lift the rate once a quarter over the next year to ease inflation - currently the foremost concern for investors.

Aviva Investors, a unit of the UK's second-largest insurer, said China may raise interest rates twice before the end of the year and tolerate currency appreciation to slow inflation from a two-year high, according to Bloomberg.

In addition to internal pressures, imported inflation spurred by the recent QE policy in the United States has heightened China's inflationary burden.

Prices of China's major imported products, including cotton, soybeans, copper and crude oil, have all seen a big surge in the past two months.