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Race against inflation

(China Daily)
Updated: 2009-08-12 13:44

Falling prices in July can certainly bring credit to Chinese officials' insistence on a moderately loose monetary policy and proactive fiscal stance. But the latest slump in new loans, a seemingly sign of credit tighting, demands a compelling explanation from policymakers about how firmly they will stick to the moderately loose monetary policy needed to boost economic growth.

Data released by the National Bureau of Statistics yesterday showed that China's consumer price index fell 1.8 percent in July from a year earlier. The fact that the country's consumer inflation has remained negative for six months and just reached the lowest level in almost a decade provides policymakers with the much-needed space to keep a loose monetary condition.

Soaring prices in the property and stock markets have recently aroused public suspicion that the government might have to rein in credit expansion to prevent a rapid return of high inflation. Yet, in view of the still sluggish global growth and lackadaisical private investment at home, Chinese policymakers decided that it is necessary to keep stoking growth with fiscal and monetary support. Meanwhile, they assured the public that they would keep a keen eye on inflationary pressures.

The government's confidence and determination to stay the course is definitely crucial for a solid and sustainable rebound of the national economy. At this critical moment of recovery, there is room for neither complacency nor panic. Hence, when investors get increasingly nervous about potential inflationary pressures resulting from record credit expansion, policymakers need to respond quickly.

The sharper-than-expected decline of new bank lending in July is the latest development that will put to test the central bank's promise of monetary easing. After a jaw-dropping jump of new loans by more than 1.5 trillion yuan ($220 billion) in June, Chinese banks cut their new lending to less than a quarter of that in July.

Maybe this is only a market-based choice by domestic lenders, but the central bank is obliged to assure the public that it does not represent a change in monetary policy dictated by fear of inflationary pressures.

Related readings:  Is it too soon to address inflation?  Statistics chief: No inflation risk in 2009  Economists allay fears over inflation  Economists: Inflation unlikely in '09

At present, falling consumer prices can still be made a good argument to dispel worries about imminent inflation. But it is widely expected now that the country's consumer inflation may turn positive by the end of the year.

Therefore, to convince the public of their resolve to keep stimulus policies unchanged, Chinese policymakers should come up with new measures to render private investment into a new source of economic growth. Government-led infrastructure projects and massive investment by big State firms have so far played a key role in putting economic growth back on track. But these are not enough for a lasting recovery. If a moderately loose monetary policy is meant to help boost private investment, it is then needed and will not necessarily fuel inflation and asset bubbles.