China Economy

People's Bank of China sounds alarm over inflationary pressures

Monetary easing abroad may put extra inflationary pressure on a recovering mainland economy, the People's Bank of China warns

PUBLISHED : Thursday, 07 February, 2013, 10:59am
UPDATED : Friday, 08 February, 2013, 3:25am

The mainland economy, already showing signs of recovery, will face inflation pressure as it falls victim to monetary easing by foreign countries, the central bank said yesterday.

The People's Bank of China said in its fourth-quarter monetary report that it would give priority to taming inflation, as its monetary policies attempt to achieve sustainable growth.

"Close attention must be paid to the risks from potential imported inflation amid the major economies' stepped-up implementations of monetary easing," the report said.

The warning, published one day before the official releases of China's consumer price index (CPI) and producer price index (PPI) for January, underscores concerns about the quality and sustainability of a recovery.

The mainland's service sector recorded the fastest growth since August last month as the non-manufacturing purchasing managers' index (PMI) hit 56.2, according to the National Bureau of Statistics. A reading above 50 indicates an expansion of business activities.

However, inflation worries still weigh on businesses executives and equity investors, who have yet to be convinced of a solid mainland economic rebound.

The mainland's gross domestic product expanded 7.8 per cent in 2012, 1.5 percentage points lower than the previous year.

A series of PMI data for the previous months showed an upward trend in the economy. However, inflation resulting from higher commodity prices could become a threat as soaring raw material and labour costs would eat into companies' profits while leading to a hard landing.

The central bank said the short supply of labour would also cause price rises in labour-intensive and service industries, as businesses increased salaries to keep skilled workers.

The Shanghai Composite Index dropped 15.95 points, or 0.66 per cent, yesterday, ending a rally that had lasted eight sessions.

Li Xiaoxuan, an analyst at Shenyin Wanguo Securities, said: "Expectations on policy incentives are high as investors pin hopes on the new leadership to boost the economy."

The government will undergo a reshuffle at the National People's Congress in March, while investors are playing wait-and-see before they see clear signs of economic recovery and a bull run on the stock market.

The mainland stock market was one of the world's worst-performing in the past three years, and the regulator is now making strenuous efforts to restore investor confidence by suspending initial public offerings and urging dividend payouts.

Wang Tao, the chief China economist at UBS in Hong Kong, said she expected inflation this year to be closer to 3.5 per cent, which means a rate rise or "policy fine-tuning" in the second half of the year could be on the cards. If inflation does show signs of surging again, it increases pressure on the central bank to choke it off just when the rest of the world is relying on an economic rebound on the mainland.