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SCMP Reporter

Interest-rate  increases and faster yuan appreciation are needed to address  tremendous inflation pressure this year, a leading think-tank said yesterday,  amid widespread expectations that January's consumer price index would hit a new high.
The State Information Centre said  inflation pressure could keep building as a result of soaring global commodity prices, rising domestic labour and resources costs and strong consumer demand.
The report, published in yesterday's China Securities Journal, came as the Ministry of Commerce announced that retail sales for the seven-day Lunar New Year holiday rose 16 per cent year on year to 255 billion yuan, despite the worst snowstorms in five decades hitting 19 provinces.
Economists have forecast that  last month's  consumer price index, a main gauge of inflation, will reach a record, after the  11-year high of 6.9 per cent for November last year.
The CPI rose 4.8 per cent  last year, more than triple the previous year's 1.5 per cent increase.
The National Bureau of Statistics is scheduled to release the  figure for last month on Tuesday.
The think-tank said there were more and more signs that price rises would continue for a long time. It said the central government should focus efforts on boosting grain supply, raise interest rates further and allow the yuan to appreciate faster.
'Around 70 per cent of mainland price fluctuations can be attributed to changes in international commodities prices. Grain prices in international markets will continue rising and affect the domestic market,' the report said.
It suggested Beijing cut grain exports, increase corn and soyabean imports to ease inflation expectations, lower import tariffs and quicken yuan appreciation to increase the power to buy  imports.
The mainland has been a net importer of grain since 2004, with net imports of 24.8 million tonnes for 2004, 22 million tonnes for 2005 and 25.4 million tonnes for 2006.
The think-tank proposed the introduction of a 'pork-grain pricing linkage mechanism' which would allow pig farmers to raise prices when grain prices rose and vice versa.
The centre said that if farmers could sell pork for more than 5.5 times the price of grain, they would be willing to raise pigs.
The central government has capped prices of products including grain, meat, milk, edible oil, eggs and liquefied petroleum gas since last month to curb soaring inflation. The report said the measure would cause shortages and lead to a black market if it was in place for a long time. In addition to increasing subsidies to farmers, the report said Beijing  should also use interest rates and exchange rates more frequently as macroeconomic control instruments.
Further interest-rate  rises could help lift the actual rate from negative territory. The current one-year deposit rate of 4.14 per cent  is lower than the CPI, even though the central bank raised interest rates six times last year.
The rate  increases are necessary to ease economic overheating and stabilise prices, and yuan appreciation could lower import prices and alleviate domestic excess liquidity.
The report did not analyse the impact of the US credit crunch and the snowstorms in the mainland's southern provinces.
Some economists have said Beijing may not raise interest rates in the near term on worries it might overdo attempts to cool the economy.
An opinion piece in the newspaper said the  macroeconomic control policies might become more flexible as  the mainland tried to tackle a slowdown in external demand and avoid domestic disaster.
Spend, spend, spend
Lunar New Year sales were up despite the snowstorms
Sales during the seven-day holiday increased 16 per cent to, in yuan 255b



More rate rises needed to fight price increases, says think-tank