Chinese policy-makers move early to rein in rising prices

The Summer Olympics will start at a most auspicious time - on the eighth day in the eighth month of the year 2008.

Only after the glory of the Olympic Games has faded away will the Chinese start to put their house in order. Decades of spectacular growth of between 9 and 11 per cent have turned China into a global economic powerhouse, but it also now needs to slow down to bring growth under control.

The People's Bank of China has risen to the occasion. A week ago it jammed the brakes on the economy by raising the reserve requirement of the banking system by a percentage point to 17.5 per cent to tame credit growth - the fifth move this year.

By raising the banks' reserve requirement, the central bank has opted for a less painful course of action than having to raise policy rates. On Tuesday alone, the Shanghai stock market tumbled 7.7 per cent on concern that the additional reserve requirement would deflate the economy.

"However, elevated liquidity and credit risks in the banking sector could limit the room for further hikes of required reserves. It is very likely authorities will have to revisit their policy rates again with the reserve requirement close to hitting the ceiling," Citigroup Global Markets said in a report.

China prefers adjusting the reserve requirement to manage excess liquidity and sterilise capital inflows. "However, China's reserve requirement is likely reaching its ceiling. It is already amongst the highest in the world. To the extent that high requirements reflect on the level of economic development, authorities may be wary in claiming that trophy," Citigroup said.

"The latest hike is probably needed to stabilise the macroeconomy only two months ahead of the Olympics, but this move could imply the beginning of the end of this quantitative policy adjustment."

For the immediate term, inflation has improved in China. The Producer Price Index (PPI) accelerated 8.2 per cent in May for the 10th consecutive month on higher energy and raw-material prices. This has kept up the pressure on policy-makers to rein in surging inflation.

China will continue to face inflationary pressures. The Consumer Price Index (CPI) for May, due to be disclosed today, will likely show an easing from April's 8.5-per-cent rise, which was the second-highest level this year, according to Dow Jones Newswires.

"The rise in the PPI threatens to feed through into sustained higher levels of the CPI, even as food prices, the main contributor to the current inflation, stabilise," Jing Ulrich, chairman of China equities at JPMorgan Securities, was quoted as saying.

Despite government price controls on oil products, petrol prices rose 11 per cent, from 10.8 per cent in April, and diesel prices were up 11.8 per cent, from 10.2 per cent. Crude coal prices were up 24.1 per cent in May, faster than 20.9 per cent in April.