All eyes on CPI to gauge future monetary moves
By Sun Lijian (China Daily)Updated: 2007-06-27 09:49
Both the market and businesses are seeing abundant liquidity, consumers have a strong desire to buy or invest and the country's exports are primarily driven by products from foreign-invested processing manufacturers. So tightening monetary policy will have a limited effect on domestic demand and inflation prevention.
Furthermore, export-orientated manufacturers are capable of making up their costs as a result of higher interest rates by selling more items at more expensive prices. Thus, increasing the trade surplus and liquidity.
China is in the middle of a reform scheme involving the renminbi's exchange rate against other currencies. The difference in renminbi interest rates against other currencies is a source of profit for investors on the international money market.
If the monetary policy is tightened and the interest rate raised in China, in other words, if the interest rate gap changes, or even if there is a possibility of such a change, the Chinese monetary authorities would face huge pressure to maintain the renminbi exchange rate and the smooth development of the reform itself.
Different from the United States and European countries, China needs reasonable economic growth, to help curb unemployment caused by economic transition, and maintain relatively low inflation. It is not easy to kill two birds with one stone.
It is not feasible to indulge inflation by keeping the monetary policy as it stands for the fear of hurting economic growth.
Therefore, the central bank of China is facing a much more difficult task of containing inflation compared to its counterparts in other countries.
The policymakers may have to resort to a complex set of tools to ensure economic soundness against the problems.
Premier Wen Jiabao and his colleagues drafted a series of countermeasures at
a recent meeting of the State Council. And the measures are correct in tackling
inflation in all possible aspects.
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