WB increases China's inflation forecast
Saturday, 21 June 2008
Geoff Dyer, FT Syndication Service
BEIJING: The World Bank sharply increased its forecast for inflation in China this year due to the potential spillover into prices from higher wages and raw material costs, although it said that headline inflation had already peaked.
In its quarterly assessment of the Chinese economy, which raised the full-year forecast for inflation to 7.0 per cent from 4.8 per cent, the World Bank said that the economy remained robust and recommended further tightening of monetary conditions.
The recent large increases in capital inflows should encourage the government to debate a one-off appreciation in the exchange rate, the bank aid, although it stopped short of actually recommending a significant change in foreign exchange policy.
The World Bank said that "the worst of the food price hikes" in China was over and that headline inflation would recede, but that the economy was facing a second wave of inflationary pressures from rising costs of industrial commodities. "So inflation is expected to come down only gradually," said the report. Consumer price inflation in May was 7.7 per cent, down from 8.5 per cent the month before.
China faced a potential inflationary risk from grain prices, which are controlled in the domestic market and are well below international levels, if global prices remained high. Inflation had not yet had a significant impact on the economy, but if it remained at current rates for an extended period, employees would either drive up wages which would damage profits and investment or they would face lower real incomes and reduce consumption.
The bank said there were few signs that inflation was being created by excessive money supply growth. However recent big increases in China's foreign exchange reserves had prompted a debate about whether the gradual appreciation of the renminbi was encouraging speculative inflows that could fuel inflation.
The real size of such 'hot money' was difficult to assess because some foreign direct investment could actually be disguised speculative inflows, but increases in reserves could also be the result of changes in the value of assets rather than new inflows.
However the World Bank said there was clearly growing concern about the size of the inflows and possible responses would include tightening capital controls and a large appreciation aimed at ending the perception that the Chinese currency was a one-way bet.
"Policymakers need to weigh the beneficial impact of more rapid introduction of exchange rate flexibility on containing speculative inflows against the potentially detrimental impact on the real economy," the report said.
Although there have been widespread reports that low-end manufacturing plants had closed down because of rising costs, the bank said the profitability and competitiveness of the country's export sector remained "healthy". Broad supply chains, a deep pool of labour and increasing economies of scale would underpin competitiveness, even if the currency appreciated further.
BEIJING: The World Bank sharply increased its forecast for inflation in China this year due to the potential spillover into prices from higher wages and raw material costs, although it said that headline inflation had already peaked.
In its quarterly assessment of the Chinese economy, which raised the full-year forecast for inflation to 7.0 per cent from 4.8 per cent, the World Bank said that the economy remained robust and recommended further tightening of monetary conditions.
The recent large increases in capital inflows should encourage the government to debate a one-off appreciation in the exchange rate, the bank aid, although it stopped short of actually recommending a significant change in foreign exchange policy.
The World Bank said that "the worst of the food price hikes" in China was over and that headline inflation would recede, but that the economy was facing a second wave of inflationary pressures from rising costs of industrial commodities. "So inflation is expected to come down only gradually," said the report. Consumer price inflation in May was 7.7 per cent, down from 8.5 per cent the month before.
China faced a potential inflationary risk from grain prices, which are controlled in the domestic market and are well below international levels, if global prices remained high. Inflation had not yet had a significant impact on the economy, but if it remained at current rates for an extended period, employees would either drive up wages which would damage profits and investment or they would face lower real incomes and reduce consumption.
The bank said there were few signs that inflation was being created by excessive money supply growth. However recent big increases in China's foreign exchange reserves had prompted a debate about whether the gradual appreciation of the renminbi was encouraging speculative inflows that could fuel inflation.
The real size of such 'hot money' was difficult to assess because some foreign direct investment could actually be disguised speculative inflows, but increases in reserves could also be the result of changes in the value of assets rather than new inflows.
However the World Bank said there was clearly growing concern about the size of the inflows and possible responses would include tightening capital controls and a large appreciation aimed at ending the perception that the Chinese currency was a one-way bet.
"Policymakers need to weigh the beneficial impact of more rapid introduction of exchange rate flexibility on containing speculative inflows against the potentially detrimental impact on the real economy," the report said.
Although there have been widespread reports that low-end manufacturing plants had closed down because of rising costs, the bank said the profitability and competitiveness of the country's export sector remained "healthy". Broad supply chains, a deep pool of labour and increasing economies of scale would underpin competitiveness, even if the currency appreciated further.