Weak dollar may lift China inflation

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Though there appears to be a light at the end of the US debt crisis tunnel, the agreement reached over the weekend in Washington won't remove concerns over a weaker dollar, which will push up commodity prices and increase imported inflation in China over the long term, analysts said.

China's consumer price index (CPI) in June reached a three-year high at 6.4 percent. Expectations for the July figure, scheduled for release in mid-August, are that it might approach or even exceed the June figure.

Zhu Baoliang, chief economist at the State Information Center, a top government think tank, said China's CPI in July would be very close to that of June, but the US debt crisis would have little influence on the figure.

"Once the alarm of debt default is removed, China will not suffer an immediate effect. However, the effect from the United States will eventually be seen in the long term," Zhu said.

Zhu said that the $1 trillion reduction of the US fiscal deficit over the next 10 years wouldn't be enough, so the debt crisis, though narrowly averted this time, might be repeated.

The US debt is too large to be resolved through normal measures such as tax increases and deficit reductions, while effective choices such as reducing entitlements and withdrawing overseas troops are impracticable considering the US political landscape, Zhu said.

Lu Zhengwei, chief economist with Industrial Bank Co Ltd, said a major effect China will have to face is a possible third round of quantitative easing, which will be a certain choice if the performance of the US economy remains poor in the second half.

"If the unemployment rate continues to rise, it will further damage investor confidence and force them to move away from US Treasury securities, leaving the US government no choice but to print money and depreciate its currency," Lu said.

According to Chen Kexin, chief analyst at the Distribution Productivity Promotion Center of China Commerce, no matter how the US debt crisis is resolved, it will push up commodity prices and increase China's imported inflation.

An agreement to raise the debt ceiling helps avoid a sudden collapse of US economy but does not get to the root of the problem. With the huge debt remaining, dollar depreciation will occur in the long term, Chen said.

"But the US government will try to bring the tempo and speed of the depreciation well under control," said Chen, who forecast a gradual decrease for the US dollar index to less than 60 in two years' time.

"Investing in precious metals such as gold and silver would normally be a hedging strategy under these circumstances, but with excess liquidity globally, investors will seek more such channels," Chen said.

In that case, medium- and long-term commodity prices will keep rising, with the oil price back to $100 a barrel and the copper price closing in on $10,000 a ton, for instance, Chen predicted.

With the rising cost of raw materials and suppressed price hikes for food, it will be hard to bring the CPI back to "mild" levels in the second half, he added.

Certain controls on food prices are due to expire. In response to these conditions, China must maintain tight fiscal and monetary policies, Lu said.

Lu predicted China's CPI for July would hit 6.5 percent, followed by a possible interest rate rise in August.