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Curbing inflation is a balancing act for China

Chinese authorities are expected to continue measures to curb price rises ahead of expected inflation.
Beijing has introduced nine increases in bank reserve requirements since October. AFP
Beijing has introduced nine increases in bank reserve requirements since October. AFP

BEIJING // With analysts warning that inflation in China could hit 6 per cent this month, the Chinese authorities are expected to continue measures to curb price rises, potentially hampering economic growth.

While China has maintained near double-digit growth in the face of crises among its trading partners, concerns over steep price rises have led to a series of tightening measures that could impact growth and are expected to affect the property sector in particular. In April Moody's downgraded the outlook for China's property sector from "stable" to "negative", and this month Standard & Poor's did the same.

Beijing has introduced nine increases in bank reserve requirements since October, most recently on Tuesday when a hike of 50 basis points was announced, and has reapetedly increased interest rates.

The Conference Board in New York said this week weaker export demand would mean "more moderate growth" in the next few months.

Patrick Chovanec, an associate professor at Tsinghua University in Beijing, said while there was "a real tension between growth and inflation", lower growth may not be a bad thing.

"If you look at last year, over half the GDP growth in China was generated from investment in fixed assets. A lot of that was fuelled by easy credit and cheap money," he said. The high inflation rate, he said, was created by a huge expansion in China's money supply over the past two years, and if this had to be curbed to fight inflation, the immediate impact would be slower growth. "That could be a good thing as some of the growth in China is not necessarily sustainable growth. Curbing inflation and slower growth is not necessarily bad," he said.

In any case, Xianfang Ren, an analyst in Beijing with IHS Global Insight, said while monetary policy had been tightened, growth rates were "pretty stable". "Even though the private sector is suffering some liquidity problems, if you look at the state sector, there are not finance shortage problems," she said.

China will not want growth rates to fall by too much as high GDP expansion is required to ensure jobs are created for the six million who graduate from university each year.

business@thenational.ae

Updated: June 17, 2011 04:00 AM

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