Tinkering with monetary policy
- By Su Manli
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Beijing Review, November 29, 2011
Price control not loosened
China's surging inflation has begun to get under control with a series of measures and policies from the government. CPI has declined since August and may continue. If domestic economic growth slows down further, the decline of CPI may accelerate. The central bank, however, considers that the future trend of consumer prices will remain unclear and the foundation of domestic price stability is not yet strong enough.
"Inflation expectations are difficult to change in a short period of time under the condition that the current consumer prices are still at high levels, especially since the global monetary conditions are extremely loose, and domestic demands over the past two years expanded too fast," said the central bank.
The central bank warned that price controls should not be loosened, because the pressures of domestic economic expansion still exist. Macro-control policies are needed to control the tempo of economic growth, the bank said.
The central bank said that many factors are expected to heighten inflationary expectations, such as rising labor costs, prices of services, and resource product prices that to be rationalized. CPI, therefore, would be more sensitive to the general demand expansion.
Song Qichao, analyst at the First Capital Securities, expected that China would say farewell to high inflation age by 2012. "Current CPI is declining rapidly, thanks to the sustained implementation of tightened monetary policy and seasonal food price fluctuation," Song said.
Currency supply proper
The growth of M2, a broad measure of money supply that covers cash in circulation and all deposits in banks, sharply fell this year to 13 percent in September from 19.7 percent in December 2010. Despite the market worried that the shrink of currency supply will affect economic growth, the central bank said in its report that the total amount of money supply is basically adapted to the demands of economic entities, considering that financial innovations led to undervaluation of the total money supply.
As renovated financial tools have constantly appeared, residents and enterprises invested in different financial institutions, contributing to undervaluation of the currency supply. With a plan to expand the statistical realm of M2, the central bank, for the first time, included housing accumulation funds and deposits in non-bank financial institutions into M2 data in October.
Some investment products and domestic deposits from foreign financial institutions have also somewhat affected money supply. Statistics from the central bank showed that, investment products excluded in the data sheets of commercial banks have increased by 927.5 billion yuan ($146.29 billion) compared with early this year to 3.3 trillion yuan ($520.5 billion) by the end of September, a rise of 45.7 percent year on year.
That means the central bank may gradually put investment products excluded in financial sheets--and domestic deposits from foreign financial institutions--into M2 statistics.
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