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Workers adjust a building model as they prepare for the 2011 Spring Real Estate Fair in Nanjing, Jiangsu province on April 20, 2011. (CHINA DAILY/Reuters/China Daily)
Workers adjust a building model as they prepare for the 2011 Spring Real Estate Fair in Nanjing, Jiangsu province on April 20, 2011. (CHINA DAILY/Reuters/China Daily)

Economy Lab

World Bank warns China on inflation Add to ...

The good news is, the World Bank says China's GDP will continue to grow at a rate that makes the rest of the world envious -- 9.3 per cent this year, and 8.7 per cent next.

But their economists are warning China's macroeconomic policies still need work to get inflation and a roaring property market under control.

"Much of the impact of the higher oil and industrial commodity prices is still in the pipeline, inflation expectations are high and there is little spare capacity in the economy. Therefore, a full normalization of the macro policy stance is important," Louis Kuijs, a senior economist with the World Bank in Beijing, told a briefing yesterday.

Along with hikes in interest rates and banks' reserve requirement ratios, Chinese officials have imposed price controls and used what the World Bank has delicately described as "moral suasion" to keep prices of food and some consumer goods from rising too fast, policies which economists warn only postpone the inevitable.

The prices of wheat and rice in China are set by government policy rather than international markets; China has also dipped into national reserves to boost supply of grains, increased farmer subsidies and exempted trucks transporting vegetables from road tolls to help limit food price inflation that hit 11.7 per cent in March.

At the end of March, the country's National Development and Reform Commission also said it would begin sending inspectors to manufacturers of consumer goods to investigate why prices were rising and suggested some of those manufacturers would be invited in for a talk with the NDRC directly -- a move widely seen as intended to discourage price increases.

"Macro policy is better placed to address the risks on inflation and the property market than moral suasion and administrative measures. It is too early to stop the macro tightening," Mr. Kuijs said.

"We think the central projection for inflation is not that bad but as we highlight, there are several sources of risks," he said, among them being delaying price increases in consumer goods to reflect the real costs of raw materials and transport. "Not doing so causes distortions…At some point, these administrative prices will have to increase and that adds inflationary pressures."

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