Steps to cool demand in China, the world’s fastest-growing major economy, could weigh on global markets at a time when recoveries in Europe and the United States remain fragile.
To begin with, the State Council, or cabinet, said it would aim to increase the supply of commodities, especially food, that have driven inflation to a 25-month high, while also clamping down on speculative demand that has lifted prices higher.
“We need to understand the importance and urgency of stabilising market prices and take forceful measures,” it said after a routine meeting chaired by Premier Wen Jiabao.
“When necessary, temporary intervention measures will be implemented on prices of some important daily necessities and production materials,” it added in the statement.
The State Council singled out grain, oil, sugar and cotton as markets that it wanted to stabilise. It also vowed to intensify a crackdown on price speculation and to punish those found hoarding commodities and pushing up prices by illegal means.
The statement made no mention of monetary policy.
“I don’t believe that they will just stop here,” said Kevin Lai, an economist with Daiwa Capital Markets. “Many people in the government are capable enough to figure out that prices controls are not that effective.”
“They really have to do something more about controlling liquidity and money supply growth if they are serious about containing inflation,” Lai said, adding that he expected the central bank to raise interest rates for the second time this year over the next two weeks.
Worries that the government could start tightening more aggressively drove China’s main stock index down by 1,9% on Wednesday to a one-month closing low. The index has dropped 11% over the past four trading days.
Shi Chenyu, an economist with the investment banking arm of the Industrial and Commercial Bank of China, said the sternly worded statement showed that inflation had reached the top of Beijing’s policy agenda.
“The government often opts for iron-fisted administrative measures to control prices when inflation becomes a serious problem,” Shi said. “However, harsh administrative measures may backfire as expectations of further price rises may intensify.”
The State Council said it would hold provincial governors accountable for the prices of “rice bags” and make mayors responsible for “vegetable baskets”, though it did not specify how it would implement these directives.
The world’s major consumer of farm commodities including cotton, corn and sugar, China has been releasing state reserves this year but has failed to cool record domestic prices. — Reuters.