Containing inflation at the root
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The frequent incidence of natural disasters, from a severe drought in the country's southwest during the first half of this year, to a catastrophic earthquake in Qinghai province and flooding in Hainan province, has also led to the short supply of some agricultural products, aggravating price rises in recent months.
A new round of quantitative easing adopted by the United States has also fuelled the price rises of some bulk commodities, adding to China's imported inflation pressures. Following its issuance of $1.725 trillion-worth of bonds, the US Federal Reserve Board announced on Nov 4 a move to buy $600 billion-worth of national debt.
The move, which means a second round of quantitative easing in the world's largest economy, has increased the amount of US currency flooding the world market and pushed up the prices of a variety of consumer commodities in the global market, especially some bulk commodities.
As a result, production costs for some domestic sectors have increased, increasing inflation pressures.
The rising prices will undercut people's purchasing power, middle and low-income groups in particular, as indicated by the drastic decline of consumer confidence among the country's rural and low-income residents.
Besides, the rising production costs will also squeeze companies' profits and prompt them to shift part of their increased costs to consumers.
Amid people's high expectations for interest rate rises, the People's Bank of China declared on Nov 17 a decision to raise the reserve requirement for domestic commercial banks, the second time in nine days and the fifth rise this year.
The move, an indication of the central bank's resolve to tighten monetary fluidity and tame inflation, has to some extent helped stabilize consumer confidence.
The country's future macroeconomic policy should focus on how to rein in inflation by controlling liquidity and monetary supplies. The country should moderately tighten its monetary policy through properly utilizing interest rates and reserves in a bid to optimize its resources distribution in the capital market.
At the same time, the government should increase subsidies to middle and low-income groups to prevent their living conditions from declining as the result of inflation.
Policy coordination among related State departments is needed to increase the supply of commodities in a bid to strike a balance between demand and supply.
A well-developed competitive mechanism should also be adopted to standardize investment and strengthen monitoring and control over hot money.
The author is head of the China Banking Research Center at the Central University of Finance and Economics.
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