Curb Inflation Now!

By Li Hong (chinadaily.com.cn)
Updated: 2007-07-25 17:04

Food prices are rising, houses are getting unbearably expensive, and stocks are trading at record highs. Many at home and abroad are seriously worried about China growing out of control. Yet, the government's monetary policy commission and the central bank until today have resisted calling the economy "overheated".

Although Premier Wen Jiabao of the State Council suggested "moderation" of the proactive monetary policy, which the People's Bank of China has pursued for the past five years, the commission and the central bank only made a small move on July 20 to raise the one-year rate on borrowing and depositing by 27 percentage points. At the same time, the Ministry of Finance reduced the taxation rate on interest income to 5 percent from 20 percent, while not discarding it completely as widely expected.

The piecemeal rate hikes by 27 basic points every two months, look strikingly identical to the policy tools implemented by the United States Federal Reserve, are far from enough to bring China's galloping economy back to normalcy. It could have adverse consequences.

Inflation eats into ordinary people's buying power and erases part of the national income, as bubbles are not values. An increasing number of urbanites, those living on government allowances or minimum safeguards especially, have decided not to buy pork, beef and other meats, simply because they cannot afford them. Some foreign commentators writing on the chinadaily.com.cn forum are joking that they are happy to see more Chinese become vegetarians.

The State Statistical Bureau reported lately that China's Consumer Price Index, a gauge of inflation, rose 4.4 percent in June, the fastest growth in 35 months. However, the central bank only took a trivial 27 basic point move upwards, setting the one-year bench market deposit rate at 3.33 percent, hardly matching the inflation rate. Most economists believe that keeping the real interest rate in negative territory is dangerous.

But, the "proactive" monetary policy, though discouraging deposits at the banks, is keeping China's overall economy fired up on all cylinders. Fed up by easy bank credit, investment projects are sprouting up like after-rain shoots, people are buying houses and stock shares at a voracious pace. And, foreign investors have jumped in, because the whole world is talking about China's bonanza, and everyone wants a piece of it.

Seldom does anyone think beyond the exuberance. The head of the State Statistical Bureau, Xie Fuzhan, told the CCTV Dialogue audience on Saturday, that China's economy is running "fairly well". Major officials from the State Planning and Development Commission said that prices will remain stable, depending on the fall farm harvest. So, don't worry about it!

But, inflation is raising its ugly head. Doesn't the doubling or even tripling prices of pork, houses and stocks in the past months tell us something bad could happen? Hongkongers used to gamble on stocks and properties before 1998, and then the monetary bubbles burst. The Japanese got the same lesson, and its economy still hasn't really risen from the tumble yet.

It is time to put pressure on China's central bankers. Curbing inflation needs effective measures. Now.