Center

CPI rise probably won't signal serious inflation

By Shi Weigan (China Daily)
Updated: 2007-06-15 08:27

With the policy tools taking effect one after another, we have full reason to believe that inflation is not going to be set off by the rapidly rising price of meat and eggs.

As a result, the authorities may need more reasons to resort to an interest rate hike at this moment.

Moreover, if the interest rate is hoisted now, it involves a potential threat to economic soundness.

The abundant, even excessive, liquidity in the Chinese financial sector is driving up prices on the stock market and the housing market. The liquidity originates from the method of foreign currency settlement and strict control over the capital account.

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The central bank has turned to several options including raising the reserve requirement for commercial bank deposits, but these measures can only partly control the liquidity in the hands of commercial banks.

Since therenminbiis constantly appreciating, more international hot money will come into China for profits if the interest rate is lifted again, loading the country with even more excessive liquidity.

The stock markets in Shanghai and Shenzhen dipped on Tuesday morning in anticipation of the CPI statistics, but soon picked up after the figure was announced.

The market reaction indicates that investors saw that the CPI was merely driven up by the meat and egg prices, instead of forecasting overall inflation. The conclusion was that the much-feared interest rate hike may not come so soon.

As a matter of fact, investors should not interpret the central bank's decision on interest rates as the authorities' current attitude toward the stock market. The CPI growth should not be viewed in the traditional sense, but with full consideration of the unusual price fluctuations in the last few months.