MercoPress. South Atlantic News Agency

China confident in reining inflation with higher interest rates

Inflation in China is forecasted to stay within the government's target zone of 3% in 2007 giving Beijing authorities enough space to push ahead with pricing reforms for resources, according to a government economist.

Zhu Baoliang, head of the economic forecasting unit of the State Information Centre think-tank, said he expected consumer prices to rise by about 2.5-2.7% in 2007 despite the index having hit an annualized 3.3% in March. Zhu forecasted prices would likely be held back in part by further increases in interest rates by the central bank, which has already raised them once this year. He expects two more 0.27 percentage point rises this year, with the first as soon as in May. The People's Bank of China (PBOC) last raised its benchmark deposit and lending rates a month ago by 27 basis points each to 2.79 and 6.39 percent. If inflation stays below 3%, the government would have enough room to start liberalizing prices for water, coal and other fuels this year, but beyond that it might hold back over concerns of further inflation, he said. China is expected to implement reforms for energy and utility prices sometime soon, but officials have stressed that they need to tread carefully to minimize the impact on vulnerable groups. Zhu also said that China should let the Yuan appreciate more quickly, to help rein in the country's huge trade surplus, which economists say is at the root of much of the excess cash flowing through the financial sector. In its effort to keep the currency from appreciating too quickly, the central bank buys most of the dollars generated by the surplus, for which it must in turn print Yuan, pumping liquidity into the banking system. "We are trying to control exports, especially for energy and resource-intensive industries, but the impact has been very slow. Why? I think it's because the Yuan is appreciating too slowly," Zhu said. The Yuan has appreciated about 5% since the central bank revalued it by 2.1% and decoupled it from a dollar peg to float in managed bands in July 2005. But critics, especially in the United States, say it remains significantly undervalued, making Chinese exports unfairly cheap in global markets. Beijing would probably continue to adjust tax policies to try to rein in exports, including removing or reducing rebates on exports, but those efforts would not have much of an impact because liquidity was at the root of the problem, Zhu said. China would continue to have a competitive advantage in labor-intensive sectors until about 2013, Zhu said. "So until then, efforts to control exports won't be of much use".