Economy

Inflation set to stay under control

By Ding Qingfen and Xin Zhiming (China Daily)
Updated: 2010-03-13 08:06

BEIJING - The possibility is "very slim" that China will see uncontrollable inflation this year but it is possible the economy may suffer from a double-dip slowdown if stimulus measures are withdrawn too quickly, said a top Chinese legislator on Friday.

"I can almost rule out the possibility of high inflation this year," said He Keng, vice-chairman of the Financial and Economic Committee of the National People's Congress.

He said the consumer price index (CPI), a major measure of inflation, would be around 3 percent for the whole of this year, a target set by the central government early this month. "This is an easy goal to reach," he said.

Inflation of 3-5 percent would actually benefit the economy because mild inflation encourages corporate investment and economic activities, he added.

In the government work report delivered last week, Premier Wen Jiabao said China will continue its relatively loose financial policies. But its CPI jumped to 2.7 percent in February from 1.5 percent in January, the fastest growth in 16 months, the National Bureau of Statistics said.

Although the Spring Festival, which fell in January last year but February this year, is an important contributor to rising CPI - because of the low base effect, the stronger-than-expected rise in CPI has sparked off fears of economic overheating and sooner-than-expected policy tightening, such as a hike in interest rates.

But He said China's grain supply is ample given its harvest in 2009, which reduces the possibility of uncontrollably high inflation this year. Food prices were the major factor driving CPI in February.

Moreover, serious inflation occurs when robust consumer demand outweighs comparatively insufficient supply. "There are no signs of that so how could we conclude that the inflation rate will remain very high (this year)?"

China suffered a bout of serious inflation in 2007 and 2008, when CPI peaked at 8.7 percent in February 2008, the highest since 1996. At the time, the rising prices of commodities on the international market had been a major cause of domestic inflation.

Now commodity prices seem stable and will not pose a challenge, He said.

Instead of worrying about high inflation, He warned China may witness a "double-dip" slowdown this year if the authorities tighten economic policy earlier than necessary.

"It (a double-dip) is not absolutely impossible," he said. "The moderately relaxed monetary policy and the proactive fiscal policy should not be changed willfully."

Although China's exports have rebounded since last December as developed economies began to replenish their inventories, the outlook remain uncertain as external demand is still weak.

And the "internal drivers" of the economy, or consumption, are still insufficient despite the central government injecting more and more funds into healthcare and social security to stimulate consumption.

"2010 will be a complicated and tough year," he said.

The country's gross domestic product (GDP) growth reached an impressive 8.7 percent year-on-year in 2009, and the government has set a target of 8 percent for this year.

The country's ratio of consumption to GDP has been on the decline in the past decades, which will impact on efforts to restructure the economy, He said. The ratio declined from 62.5 percent in 1978 to 48.6 percent in 2008.

And China is still facing severe unemployment pressures, with over 12 million laborers sitting idle this year, according to the Ministry of Human Resources and Social Security.

He also criticized the accuracy of real estate price statistics released by the National Bureau of Statistics. The bureau said house prices grew 1.5 percent year-on-year in 2009, going against the impression of the general public. The real figure could be as much as 30 percent or even higher.

"I don't believe the figure," said He, who is also the bureau's former deputy chief. "There must be something wrong."

The bureau has been a target of criticism during the ongoing National People's Congress (NPC) and Chinese People's Political Consultative Conference (CPPCC) sessions.

Wang Shaojie, a CPPCC member, said in his proposal that the overall statistics system must be reformed and those who provide false data must be punished in accordance with the Statistics Law, which was passed last June.

Guo Songhai, an economist and CPPCC member, said in his proposal that the bureau should disclose how it conducted its data collection and calculated house prices.

Responding to such criticism, Ma Jiantang, the bureau's chief, vowed to improve the body's work to make its statistics more accurate.