"The primary risk to China's economy is inflation and the government will stick to the tight monetary policy," Central Bank Governor Yi Gang said. To soak-up liquidity, the central bank will select an optimal package of currency, interest rate and money-supply measures, Gang said.
Chinese officials have re-focused their efforts on inflation after its surging economy and a series of large snowstorms led to the nation's highest inflation rate in January 2008 -- a 7.1% annualized rate -- since its transition from a centrally-planned to a market-based economy. Earlier, China shifted its monetary policy "from prudent to tight" in 2008 to prevent overheating and a surge in inflation.
China: inflation concerns
Economist David H. Wang told BloggingStocks Monday China's tight monetary policy is warranted, but he expects it to have more of an impact on business-to-business prices, what the United States calls a producer price index or PPI, than on consumer-level inflation.
"Early on in China's transition to capitalism, Chinese officials have shown considerable ability to limit business processes through forced business slowdowns, so I think that in tandem with higher interest ranks and bank reserves will slow commercial activity and producer prices somewhat," Wang said. "On the other hand, their record reining-in the Chinese consumer is less impressive. The sheer number of retail outlets, and 'black market' or unofficial stores has made it harder to limit retail inflation. Merchants obviously have a strong incentive to pass increased costs along in the form of higher prices, so it will take a slowdown in Chinese consumer spending to quell inflation. So far that slowdown in consumer demand has not occurred."
With the above in mind, Wang said he still expects 2008 consumer price inflation in China to total about 6-7.5%, well above the government's targets. China's inflation rate for 2007 was 4.8%, well above the official target of 3%, Wang said.
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