China must balance rising inflation with growth risks, central bank adviser says

[BEIJING] Imported inflation stemming from the Middle East conflict will put pressure on China’s economy, requiring policymakers to juggle rising inflation alongside slowing growth, a Chinese central bank adviser said on Tuesday (Mar 31).

While consumer inflation remains subdued and provides some buffer, the extent of the impact will hinge on how long and how severely the conflict drags on, Huang Yiping, a member of the monetary policy committee at the People’s Bank of China (PBOC), said at a media briefing in Beijing.

China’s year-on-year consumer inflation accelerated to the highest in more than three years in February to 1.3 per cent, but remained below the government’s around 2 per cent target for the full year.

“What I am worried about the most is the shock to companies’ profitability from rising oil prices, as the squeeze would be very adverse for the real economy,” Huang said.

Monetary policy has limited scope to offset imported inflation, but a policy response is certain if price increases become widespread, he added.

“We will have to balance between the rising inflation and the downward pressures on economic growth.”

PBOC governor Pan Gongsheng has said the central bank will maintain an “appropriately loose” monetary stance, deploying tools including reserve requirement cuts and interest rates to keep liquidity ample.

China’s five-year plan, released earlier this month, pledged to “significantly” raise the share of household consumption in the economy over the next five years from around 40 per cent at present, though it stopped short of setting a specific target.

Huang said the experiences of Japan and other Asian economies showed that raising the consumption component of an economy is a gradual process, especially in export-oriented economies where income growth may not be fast enough to drive a rapid shift.

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China’s consumption share of gross domestic product – encompassing household and government consumption – has risen to about 57 per cent from a trough in 2010, though that remained well below the global average of around 75 per cent, Huang said.

“Rebalancing has been underway for more than a decade, but it is still not sufficient and the process is continuing,” he said. “From a broader perspective, the pattern of strong supply and weak demand has yet to be fundamentally resolved.”

Huang said he hoped consumption’s share of GDP could rise by about one percentage point a year over the next five years. REUTERS