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Sunday, December 09, 2007

China's Inflation Problem

From Bloomberg today:

China's inflation probably held at the its highest level in more than a decade, adding pressure on the central bank to raise interest rates for a sixth time this year or let the yuan appreciate faster.

Consumer prices rose 6.5 percent in November from a year earlier, according to the median estimate of 21 economists surveyed by Bloomberg News. That's unchanged from October's pace, the fastest since December 1996. The statistics bureau will release the figure at 10 a.m. tomorrow.

China on Dec. 8 ordered banks to increase reserves by the most in four years, three days after government said it would shift to a ``tight'' monetary policy among measures to cool the world's fastest growing major economy. U.S. Treasury Secretary Henry Paulson, who visits Beijing this week, recommends faster appreciation of the yuan to tame price increases.

``China's policy makers are facing a red hot economy with galloping inflation and asset prices,'' said Daniel Melser, an economist at Moody's Economy.com, a unit of Moody's Investors Service in Sydney. ``The best way to combat inflation would be to loosen the leash on China's tightly managed currency.''

In the latest move to limit credit, the central bank will require lenders to put aside a record 14.5 percent of deposits, starting Dec. 25, up from the previous 13.5 percent.

The increase, which was twice as much as the nine others this year, ``reflects the urgency of inflation concerns of the government,'' said Liang Hong, an economist at Goldman Sachs Group Inc. in Hong Kong.

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