Hold tight and hope in anti-inflation fight
On Wednesday, Premier Wen Jiabao declared that inflation is public enemy number one in China. Yesterday Beijing's leaders wheeled the three guys actually responsible for fighting this foe out to face the press: Finance Minister Xie Xuren, National Development and Reform Commission chief Ma Kai, and central bank boss Zhou Xiaochuan.
Unfortunately, anyone hoping for some reassurance that they are winning the battle had very little to go on.
With all the talk at this week's National People's Congress about the scourge of rising prices, you have to wonder if some of the assembled bigwigs have had a sneak preview of February's inflation data, and that what they saw was not pretty.
January's figure was unpleasant enough: retail prices were up 7.1 per cent over the previous 12 months, with food up 18 per cent and pork up a painful 59 per cent. Anecdotal accounts of traders taking advantage of last month's bad weather to ramp up prices would seem to indicate that February's inflation rate will be higher still. Goldman Sachs expects 8.5 per cent. Other analysts hint darkly that the actual number should be closer to double figures.
Worse, there are signs that price pressures will get worse before they moderate. The bad weather damaged winter crops and according to reports killed as many as four million pigs, which implies that food prices will carry on rising over coming months.
Meanwhile, the NDRC said yesterday that property prices rose 11 per cent over the 12 months to January, which will push up housing costs, a major component of ordinary people's spending. At the same time, raw materials' prices are up sharply, forcing manufacturers to pass on more of their cost increases to consumers.
So far Beijing has tried combating inflation on two fronts. On the administrative side, the government has forbidden retailers from raising the prices of some staples and attempted to ration bank credit, with limited success. Those controls look set to stay in place.
On the monetary side the central bank has both jacked up interest rates and allowed the yuan to rise in value (see charts below). Neither measure has so far had any obvious impact on price pressures.
In fact, they may even be making inflation worse by encouraging heavier flows of illicit capital into China to take advantage of the higher interest rates and strengthening currency, boosting domestic money supply.
Faced with these problems, the three economic chieftains had little new to offer. More interest rate increases are on the cards, to follow the six increases seen last year, as are more increases in banks' required reserve ratios. Further currency appreciation is also likely.
But with key lending rates below the inflation rate, small increases in interest rates will do little to dampen enthusiasm for borrowing. And with money pouring into the banking system through trade and investment inflows, raising reserve requirements can barely contain the excess liquidity.
Meanwhile, rapid currency appreciation - the yuan has risen 4 per cent since the beginning of December - is prompting complaints from exporters and their supporters in the Ministry of Commerce. Mr Zhou from the central bank appeared to acknowledge these protests yesterday, when he said 'the exchange rate should not be a key measure in fighting inflation'.
All of which leaves the inflation fighters with few effective weapons against rising prices.
Despite all the talk, it seems their actual policy is to hold tight and hope that food price rises will abate over coming months, while inflows through the trade surplus ease and raw material prices moderate in line with a softening global economy. Let's hope it works out.