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Financial Problems Linked to Food

December 12, 2007 | By More

Chinese inflation reached an 11-year high of 6.9 per cent in November, a level that will harden Beijing’s resolve to tighten monetary policy and probably further delay energy price reform.

The inflation rate, which hit 6.5 per cent in October, is driven primarily by food prices, which rose by 18.2 per cent from a year -earlier, mainly because of a shortage of pigs and rising global feed costs.

But underlying inflation was also up to 1.4 per cent from 1.1 per cent in October – the sharpest rise this year – because of higher oil and coal prices. Utility prices, including water, electricity and gas, rose 5.6 per cent.

China economists said the continuing upward pressure on inflation was likely to prompt further government pressure on banks to control lending, as well as interest-rate rises and increases in reserve ratios, the amount banks must keep on deposit with the central bank.

The government has already refused to lift fuel prices in line with rising -global costs, and has increased subsidies to some sectors for oil as part of an array of measures to restrain inflation.

China is also expected to allow the renminbi to appreciate faster over the next 12 months in an effort to correct imbalances in the economy and reduce incentives for exporters. The trade surplus, a prime cause of excess liquidity in the economy, was $26.3bn (€17.9bn) in November, only slightly lower than the record $27.1bn, according to figures released yesterday.

Although growth in exports to the US has slowed, increases in sales to Europe, the Middle East and other markets have helped keep the surplus high.

In a potentially significant move for global trading in steel, China’s chief economic co-ordination ministry said it might impose quotas for exports next year as part of a raft of efforts to limit the trade surplus.

Steel exports are up by 55 per cent year on year in the 11 months to November and have contributed significantly to the swelling surplus. They have begun to slow in recent months because of tax imposts.

The People’s Bank of China announced last week that monetary policy would move from “stable” and “moderately tight” to “tight”, primarily because of concern over inflation and possible overheating.

China has lifted interest rates five times and reserve ratios 10 times this year, with little impact so far on either the pace of economic growth or inflation.

Mr Zhou said another reason for moving into a tightening cycle was the five-yearly change of governments in Beijing and the provinces early next year, which in the past has seen a huge jump in lending as new leaders attempt to spur growth

Category: Food

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