Beijing) - Reining in soaring prices has Become the No. 1 priority of the Chinese government for 2011 as inflation continues to erode the savings of low-income families and inflate asset bubbles.
In the December 10 to 12 annual economic work meeting chaired by Chinese President Hu Jintao, the government made it clear that stabilizing prices without jeopardizing growth is at the top of the agenda for next year.
Lower-income households, which make up an overwhelming majority of the population, bear the brunt of inflation because they spend much of their income on daily necessities and do not meet the threshold to invest in property markets or buy gold to cushion against inflation. The issue of inflation has generated increasing public scrutiny.
The consumer inflation index rose 5.1 percent in November, up from 4.4 percent in October and the highest in 28 months. In the January-November period, inflation already reached 3.2 percent, above the government's annual inflation target of 3 percent.
The target of breakneck economic expansion, exemplified by double-digit gross domestic product (GDP) growth rates, has been scrapped. In 2010, the government has been striving for 8 percent annual growth while putting more emphasis on economic restructuring. To strike a balance between stable economic growth, which guarantees the creation of new jobs, and mild inflation, which does not harm livelihoods of ordinary people, has been a sound choice for the government. It is a balancing act which requires art.
Inflation was not a concern until September as most economists had expected inflation to peak in the middle of 2010 and go downhill in the rest of the year. China's loose monetary policy has been widely blamed as the major culprit for higher-than-expected inflation rates. In 2009, M2, the broad measure of money supply, grew 27.7 percent while GDP expanded by 8.7 percent. In 2010, the government set the target of money supply growth at 17 percent. China's excess liquidity has fueled asset bubbles.
Negative deposit interest rates have also caused savers to relocate bank deposits to stock markets and housing markets. Even after the central bank raised the interest rate by 0.25 percentage point to 2.5 percent in late October, actual deposit rates were still negative as inflation has continued to climb since July. Housing prices have kept going up nationwide despite two rounds of stringent tightening measures, adopted in mid-April and late September respectively, including a ban on the purchase of third apartments. The U.S. Federal Reserve's quantitative easing measures also drove up the prices of commodities, of which China is a major importer.
The Politburo of the ruling Communist Party on December 3 decided to switch from a "moderately loose" monetary policy adopted in the past two years to a "prudent" stance, in place between 1997 and 2008. Money supply is certain to be tighter next year than in 2010. However, the extent to which the tightening will be applied is still unknown. Caixin learned that the annual new lending target is likely to be set at 7 trillion yuan, compared with 7.5 trillion yuan in 2010, 9.6 trillion yuan in 2009 and 4.9 trillion yuan in 2008.
After the onset of the global financial crisis, China unveiled a stimulus package in November 2008 and a lending spree by banks came as well. Keeping inflation at bay and tamping down assets bubbles haves now become an increasingly urgent task for the government. Economists have offered much advice, ranging from interest rate hikes, draining liquidity by raising reserve requirements to allowing the yuan to appreciate at a faster pace in 2011.
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