China Still Faces Inflationary Pressure, Central Bank Says

China still faces “large” inflationary pressure and the central bank will maintain a “prudent” monetary policy, the People’s Bank of China said today.

“We must pay close attention to the latest international and domestic economic and financial trends and influences, and implement a prudent monetary policy,” the central bank said in a statement after a meeting of its monetary policy committee.

Premier Wen Jiabao said last month the government would have difficulties meeting its annual 4 percent inflation target although the overall level of prices is “controllable” and is expected to drop steadily. Surging vegetable and pork prices, and higher wages and raw-material costs may have pushed consumer-price gains to an almost three year high in June.

Inflation likely accelerated to 6.4 percent last month, a figure likely to prompt the fifth increase in interest rates since October, according to UBS AG China economist Wang Tao. China International Capital Corp. economists estimate prices may have jumped 6.2 percent in June compared with 5.5 percent in May that was the fastest in 34 months.

In an article published today, central bank Governor Zhou Xiaochuan indicated that tackling inflation remains the government’s priority. He reiterated government pledges to improve the nation’s exchange-rate mechanism.

Exchange-Rate Flexibility

The PBOC aims to “enhance exchange-rate flexibility and maintain the basic stability of the yuan’s exchange rate at a reasonable and balanced level,” Zhou wrote in a commentary in the latest edition of China Finance, a magazine published by the central bank.

Yuan forwards rose for a fifth day, the longest winning streak since March, on speculation policy makers will combat inflation by letting the currency appreciate.

The People’s Bank of China set the currency’s reference rate 0.04 percent higher at 6.4661 per dollar, the strongest level since July 2005.

“Curbing inflation remains the focus of the Chinese government policy this year,” said Tommy Ong, senior vice- president of treasury and markets at DBS Bank (Hong Kong) Ltd. “As interest-rate hikes and administrative measures harm economic growth, China would opt to let the yuan rise faster to lower imported inflation.”

Echoing comments from the monetary policy committee, Zhou said the central bank will continue with its prudent monetary policy while keeping prices stable.

‘Prevent Big Swings’

Zhou’s article was published along with pieces written by the heads of China’s banking, insurance and securities regulators as part of a special edition of the magazine to celebrate the Communist Party’s 90th anniversary.

Zhou also said China needs to improve the regulatory system governing systemically important financial institutions and use various market-oriented tools to manage liquidity in a bid to “prevent big swings in economic growth”.

The central bank will maintain a “reasonable” level of society-wide financing, the monetary policy committee said today, a reference to a monetary indicator for liquidity in the economy that includes corporate bonds and stock sales, and off-balance sheet lending in addition to bank loans.

“The economy is heading in the expected direction but the country’s economic and financial situation is still complicated,” the monetary policy committee said. “The world economic recovery remains slow and still faces many risks.”

Bloomberg

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