Setting The Scene For A Higher Inflation Target

Inflation, at 4.4% in October and widely perceived to be on the rise, is way above the government’s target of 3% for the year. Food price controls have been imposed. Inflation, perennially politically sensitive, has become policymakers’ number one concern.

Louis Kuijs, senior economist in the World Bank’s Beijing office, questions the fuss. He says that by emerging markets standards 4-5% inflation is “moderate” and should not be “seen as a major problem”. The risk, Kuijs says, is pushing inflation down too far will hinder relative price changes that are needed to adjust the structure of the economy, i.e. getting rid of distorting price subsidies for resources and utilities , particularly energy and water.

Somewhat higher tolerance to modest inflation could help bring about some of the structural reform and change that the government is aiming for.

Kuijs says that policymakers should focus on monetary policy.

After the spectacular increase in monetary aggregates since the end of 2008, monetary growth will before long need to come down to rates broadly similar to nominal growth.

Which is a sharper tug on the reins than now being undertaken, even allowing for the shift in lending policy from “moderately loose” to “stable” and the latest hike in banks’ reserve ratios today.

China’s annual top-level meeting on economic policy for the forthcoming year opens this weekend. It will focus on how quickly the Chinese economy can grow without overheating. With Kuijs’s remarks being published in state media, this Bystander wonders if this isn’t all a bit of pump-priming for a new, higher, inflation target for 2011 to go along with the expected interest rate rises and a 1 trillion yuan (150 billion) reduction in the new-loans quota to 6.5 trillion yuan as policymakers seek to steer a soft landing from the stimulus spree of the past two years.

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