Can curb inflation, China says

Commission tries to quell fears over rising food prices

A man eats in a Beijing restaurant on Friday, the day China’s government ordered banks to set aside larger reserves to limit inflation.
A man eats in a Beijing restaurant on Friday, the day China’s government ordered banks to set aside larger reserves to limit inflation.

— Beijing has the capacity to control surging prices while keeping economic growth on track, China’s main planning agency said Monday, in the latest effort to quell public anxiety about inflation.

Conditions are right for cooling prices despite worries over rising food prices, the National Development Reform Commission said Monday on its website.

“This fear is understandable, but we can safely say that the current conditions in China are fully conducive to maintaining basic price stability,” the statement said. “This country has the capacity to keep the price level basically stable.”

The effort to defuse public unease came after Beijing announced its second bank-reserve increase in two weeks on Friday in an effort to curb lending and cool inflation that rose to a 25-month high in October.

Many in China expect an interest-rate increase to follow.

Food costs jumped 10.1 percent in October over a year earlier, raising inflation to 4.4 percent, well above the government’s 3 percent target.

Chinese stock markets have fallen amid investor fears that an interest rate increase or tighter economic controls imposed to control inflation might further slow growth that has declined after hitting double-digit levels this year.

The planning agency said supplies of farm products such as poultry, eggs, grain and cooking oil are sufficient. It said the government has adequate reserves, despite droughts and other natural disasters this year.

The agency called on local authorities to ensure steady production and supplies and to better regulate markets to prevent any disruptions.

“They are just not addressing the fundamental problem at all,” said Patrick Chovanec, an associate professor at Beijing’s Tsinghua University. With the expansion of credit and cash in the economy stemming from China’s response to the global crisis, “you’re sitting on a volcano,” said Chovanec.

The People’s Bank of China has raised its benchmark interest rates once this year, lagging behind Malaysia, Thailand, Taiwan and South Korea as emerging Asian economies led the global economic rebound. Policy makers have instead relied on guidance to banks to scale back lending and on increases in reserve ratios.

Economists say money flooding through the economy thanks to stimulus spending and bank lending helped push up October inflation.

China’s regulators also worry that soaring lending is fueling overspending on real estate and other assets and could leave banks burdened with unpaid loans if ill-considered projects default.

Beijing has slammed the U.S. for monetary policies it says are flooding emerging economies with cash seeking higher returns because of low interest rates and the weakening U.S. dollar.

China’s Cabinet promised last week to ensure adequate supplies of coal, power, oil and gas and said it would impose price controls on daily necessities if required.

The government also has promised food subsidies for the poor and increases in pensions and minimum wages.

While price controls may help with inflation expectations, they will either be ineffective because producers circumvent them or create shortages if suppliers suffer losses and are not compensated, said Goldman Sachs Group Inc. economists Yu Song and Helen Qiao in a Nov. 17 note.

“Prices for everything are rising every day -- no exception,” said Zhu Fulong, 35, who has run a grocery shop in Hangzhou, a city near Shanghai, with his wife since 2006. “A lot of people won’t increase their spending much, so they instead choose products at lower grade which we sell at thinner margins, and that’s hurting our business.” Information for this article was contributed by The Associated Press and Bloomberg News.

Business, Pages 23 on 11/23/2010

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