Wen: We Are Beating Inflation

BEIJING, Dec. 25 --  The government will be able to keep inflation in check, Premier Wen Jiabao said on Sunday, after the central bank raised interest rates for a second time in just over two months.

The central bank raised one-year lending and deposit interest rates by 25 basis points on Dec 26, after issuing a statement posted on its website on Saturday.

Steps taken in the past month, including price controls to curb speculation and monetary tightening, have started to produce results, Wen said in a radio broadcast.

The central government has raised the reserve requirement ratio for banks six consecutive times and increased interest rates twice this year to absorb excess liquidity in the market to support healthy economic development.

The State Council, China's cabinet, has also been trying to rein in food prices by increasing production of vegetables and other basic goods.

"I believe we can keep prices at a reasonable level through our efforts. As a major leader of the government, I have the responsibility and I have the confidence, too," Wen said, referring to large grain reserves as well as moves to support production by reducing and waiving taxes.

The country is facing inflationary pressure as the consumer price index (CPI), a main gauge of inflation, accelerated to a 28-month high of 5.1 percent in November.

This is the second time the central bank hiked interest rates in 2010 after it raised the benchmark lending and deposit rates by 25 basis points on Oct 20, for the first time in about two years.

The country will bring its overall money supply to a normal level with a range of policy tools next year as the government shifts monetary policy from "moderately loose" to "prudent", the central bank said on Friday in a statement on its website, citing Hu Xiaolian, deputy governor.

Hu stressed that China is facing pressure due to excess liquidity from home and abroad, and for the next phase the government will work on liquidity controls with a range of policy tools, including open market operations, and adjusting interest rates and reserve requirement ratios.

Brian Jackson, economist with the Royal Bank of Canada, believes China will see another 75 basis points of rate hikes in 2011.

Wang Tao, chief China economist at UBS Securities, shared a similar viewpoint. "The average CPI will range from 4 to 4.5 percent in 2011, and the inflation risks will be manageable. We expect an increase in interest rates by 75 basis points next year."

The expectation of interest rate hikes next year, however, will also attract an inflow of overseas speculative money seeking quick returns.

According to the Yellow Book of the World Economy, published by the Chinese Academy of Social Sciences (CASS) on Sunday, the risk of deflation in developed economies and inflationary pressure in emerging economies will further intensify next year, resulting in capital flow from developed to developing countries.

The interest rate gap between the United States and India, for instance, has reached 6 percent, according to the book.

"The scale of hot money flooding into China will definitely increase next year, due to the interest rate gap and the expectation of renminbi appreciation," said Zhang Ming, a senior research fellow of CASS.

"Stock and property markets are still the two major fields for the inflow of speculative money. China thus faces more pressure in containing asset price growth next year," he added.

Foreign investment in China's property sector rose 48 percent to $20.1 billion in the first 11 months of 2010, the Ministry of Commerce said on Dec 15. This is almost three times the 17.7 percent increase in the country's total overseas capital inflow.

"The climbing interest rate and a stronger yuan will definitely make the mainland a more attractive destination for us, but we will not change our investment strategy right now as we are a long-term investor," said a managing director at a US-based real estate fund.

Li Daokui, an academic member of the central bank's monetary policy committee, said the inflow of hot money is not expected to have a major impact on China, given the scale of the country's economy and controls on capital flows.

International Monetary Fund statistics show that China will replace Japan this year as the world's second largest economy in terms of its overall GDP.