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China: Inflation Number One Threat

March 6, 2008 (EIRNS)—Inflation is seen as the most immediate threat to the stability of the Chinese economy. The Chinese press repeatedly raised the question of just how effective the government's "tight monetary policy" is, given that there has been no resolution of China's fundamental economic problems of excessive liquidity, the trade surplus, and rising prices. Ma Kai said that the measures which Beijing has taken in the wake of the 1998-99 Asian financial crisis have at least been able to prevent what could have been "unthinkable" consequences for the country. Most important, China was able to reverse its shrinking grain harvests, and produce "bumper" harvests in each of the past five years — "something rarely seen in Chinese history." At the same time, overheated and "haphazard" investment has been brought under control, and steps taken towards shifting the economy away from its export-dependence to developing its huge internal capacity. Had these control measures not been taken, "serious" inflation and "drastic fluctuations" would already be far worse than they are, Ma Kai said.

On China's trade surplus, Ma Kai also noted that the real issue is the international economy—the United States, Germany, and Japan all have had trade surplus economies for many decades, but, especially when world trade is fair and even, this does not have to be a problem. The core of China's anti-inflation policy is ensuring sufficient production of grain and other basic necessities, rather than just price controls, NDRC minister Ma Kai said at the press conference today. "The number one item on the agenda" is to prevent "significant inflation," he said. "This is a daunting task." The policy laid out by Prime Minister Wen Jiabao in his National Work Report yesterday, is to protect the Chinese food supply—currently the area hardest hit by inflation—by expanding grain, meat, and cooking oil production, and tightly controlling both export and industrial use of grain. Rising labor and energy costs are adding to the pressure, Ma Kai said. The government will also enforce regulation to stop speculation on rising prices.

Another anti-inflation move will be to "curb" exports of products which consume too much energy and resources - the cheap "processing trade" exports which have supplied the U.S. and other markets, but done nothing to develop the real Chinese economy. Ma stressed that the new controls are not "price freezes," but regulatory measures.