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June 23, 2011 10:30 pm
Chinese premier Wen Jiabao has declared victory over domestic inflation, saying that the government has successfully reined in price pressures.
“China has made capping price rises the priority of macro-economic regulation and introduced a host of targeted policies. These have worked,” Mr Wen writes in Friday’s Financial Times. “We are confident price rises will be firmly under control this year.”
Consumer price inflation has been rising since the middle of last year, reaching a 34-month high of 5.5 per cent in May. Politically sensitive food prices have been the main driver of headline inflation, rising more than 10 per cent year-on-year in each of the past five months. Food inflation hit 11.7 per cent in May, feeding fears that persistent price rises could exacerbate social tensions.
Most analysts predict that the headline inflation rate will peak soon, before starting to decline. According to a HSBC purchasing manager’s index, inflationary pressures have eased in the manufacturing sector.
“The overall price level now is within a controllable range and is expected to drop steadily,” Mr Wen writes.
Beijing has been tightening credit conditions over recent months, raising interest rates on four occasions.
Mr Wen also noted that China has an abundant grain supply after seven consecutive years of increasing output.
“The ongoing slowdown is helpful to check inflationary pressures, which remain the top macro risk for China,” said Qu Hongbin at HSBC.
“[But] food inflation is likely to remain high since the recent floods in southern China could cause temporary disruption to food supply.”
China’s top leaders will gather early in July to decide the direction for economic policy in the second half of the year, and analysts say if inflation is under control then Beijing may be willing to ease credit restrictions in order to engineer a “soft landing” for the economy.
“There is concern as to whether China can rein in inflation and sustain its rapid development,” Mr Wen said. “My answer is an emphatic Yes.”
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