Rising prices were once again on Beijing’s agenda as it emerged that inflation rose to an 11-year high of 6.9% in November. The accelerating consumer price index has been a theme of China’s summer and autumn, with increasing food prices largely to blame.
The price of pork was up 56% year-on-year in November while cooking oil prices rose 35%, contributing to an overall increase in food prices of 18.2%. Economists describe food prices as a cyclical phenomenon but this does not explain away the 1.4% increase for non-food items in November, up from 1.1% the previous month. Higher oil, coal and utility prices are seen as being responsible.
Full-year inflation for 2007 is expected to be 4.5%, well above the official target of 3%.
While currency appreciation is likely to speed up in 2008, Beijing is expected to try and curb inflation through monetary measures such as restrictions on bank lending and increases in interest rates and banks’ required reserve ratios.
Indeed, it was announced in December that banks’ reserve ratios – the amount of money they must leave on deposit with the central bank – will rise by a full percentage point (it’s usually half a point) from December 25. It was the 10th increase of 2007 and takes the ratio to 14.5%.
The government stressed the need for tighter financial controls at its annual Central Economic Work Conference in December, which was chaired by President Hu Jintao. Beijing said it would change its stance on monetary policy to “tight” in 2008 from the “stable-to-tight” approach employed since the middle of 2007.
With this in mind, the central bank has started putting pressure on banks to curb lending. Banks were told in October to keep net new loans at mid-October levels until the end of 2007. In November China saw its first month-on-month decline in credit growth since the start of the year.
This was partially responsible for industrial output growth slowing for the third consecutive month in November.