Brokerage tips inflation below 20pc this year

PUBLISHED : Friday, 03 June, 1994, 12:00am
UPDATED : Friday, 03 June, 1994, 12:00am

INFLATION in China's urban areas will come down to well below 20 per cent by the end of the year as the economy continues to slow down, says Salomon Brothers.


The American broking house said in a report the inflation rate might be achieved in the context of a nine per cent economic growth rate.


It said that given the economic growth of 12.7 per cent in the first quarter, the nine per cent target seemed unrealistic, but if industrial output could be contained within the 15 to 18 per cent range, it was potentially achievable.


Industrial output grew 18.5 per cent year on year during the first quarter.


It added that as accelerating inflation could lead to social unrest, it was not surprising that the central government placed a priority on reining in high prices.


Thus, a combination of measures such as credit restraint, stockpiling and distribution of food through state retail centres to smooth out seasonal and temporary shortages had been used to contain prices.


Salomon said these measures would filter down to the economy and would be reflected in the lower inflation rate.


''If the current trends continue, by late summer this year urban inflation may well fall to the high teens, and may even be in the mid-teens by the end of the year,'' it added.


Inflation in the urban cities fell to 23.2 per cent in April, after hitting a peak of 25.9 per cent in February.


Salomon predicted that there was a strong chance of nationwide inflation coming down to the low teens towards the end of the year, which would still be higher than the country's target of less than 10 per cent.


''If inflation is in the low teens towards the end of the year . . . the authorities will be tempted to ease up on credit restrictions, particularly if investment rates by state enterprises have been kept on a declining trend.'' Government figures show that on a national level, inflation was still high, at 21.7 per cent, although it fell from 22.3 per cent in the first quarter.


To prevent a resurgence in inflation, Beijing has resisted mounting calls from the provinces to ease lending for the construction sector, a key cause of high prices, in the second half of the year.


Salomon said ideally, Beijing should persist with its austerity measures next year, albeit on a selective basis, although it did not think the government would do so.


It praised Beijing for persevering with the economic reform programme throughout ''this period of difficult macroeconomic adjustment'' in spite of added problems that the reforms might produce this year.


Describing 1994 as a ''very difficult'' year, Salomon said it was crucial as Beijing's ability to engineer solutions for lower inflation without causing socially unacceptably high unemployment would be tested.


The rapid influx of underemployed or unemployed farmers to urban centres had put the city's weak or non-existent infrastructure, particularly housing, under severe strain.


The squeeze on the state sector had been a key factor of the rising numbers of unemployed. Broad estimates put the number of redundant workers in the state sector at between 10 and 20 million, with a further 120 million underemployed in the rural areas.


Salomon said evidence suggested that the dynamic private sector would assume an increasingly important role in creating jobs for the labour force.


It added that ''all the data available to us indicate that the worst-case scenarios of an abrupt slowdown or of severe social unrest are unlikely to materialise as the economy has been slowing down and inflation will eventually be brought under control''.


The Chinese economy expanded by an unsustainably high rate of 13.4 per cent last year, compared with 13 per cent in 1992.