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PRC's inflation rate may speed up, Wen warns

Chinese Premier Wen Jiabao (溫家寶) warned yesterday that already-high inflation may accelerate as the country prepares to host the Beijing Olympics. But he promised an anxious public that price increases could be held at the official 4.8 percent target this year.

Wen said the Chinese economy should grow strongly this year, though he acknowledged he was "deeply worried" about the global impact of the US subprime crisis.

Beijing's top priority is cooling inflation that is battering ordinary Chinese, Wen said at a nationally televised news conference at the end of China's annual legislative session.

"We are under mounting inflationary pressure. We also face the potential risk of drastic economic fluctuations," Wen said.

He announced no new initiatives, but said: "If we take the right measures, we are confident we can control inflation."

Inflation soared to 8.7 percent last month, its highest level in nearly 12 years, driven by a 23.3 percent jump in food costs despite the imposition of price controls. That has fueled concern about unrest in a society where the poor spend up to half their income on food.

Bouts of high inflation in the 1980s and 1990s sparked protests, a scenario that communist leaders are eager to avoid, especially as China comes under foreign scrutiny ahead of the Summer Games.

Sharp price rises began in the middle of last year, triggered by shortages of pork, grain and some other food items. Nonfood inflation is low, with prices last month rising 1.6 percent over the same month last year. But costs of wholesale goods and raw materials are rising, adding to pressure for higher consumer prices.

Beijing has raised interest rates repeatedly to cool pressure for price rises amid a boom that is expected to see the economy grow by at least 9 percent this year after an 11.4 percent expansion last year.

China has the right conditions to control inflation, with a "general oversupply" of industrial goods and an ample 135 million to 180 million tonnes of government grain reserves, Wen said.

The government has been releasing grain at below-market prices to ease shortages.

Economists say Wen's 4.8 percent inflation target looks unrealistic as wholesale prices rise, increasing pressure for companies to pass on higher costs to consumers. Outside forecasts of full-year inflation are as high as 7.2 percent.

Still, Wen said: "We have no plans to change this predictive goal. We believe that by setting this goal, we have shown the resolve of the government to control price rises. We also want to stabilize people's expectations for price rises."

Wen warned that China was bound to be affected by the subprime crisis, which has sent financial markets reeling.

"I have watched these developments in the world economy very closely and I am deeply worried," he said.

But he said China's own economic fundamentals are sound.

"China still has vast market potential, especially in rural areas," he said. "That is why we are confident of China's economic prospects."

The premier promised more market-style reforms to help control inflation.

"We need to strengthen and improve our efforts in macro-economic regulation and we need to give full play to market forces in allocating resources," he said.

That would include reforms of China's government-owned banking industry, he said.

One of China's new vice premiers, Wang Qishan (王岐山), a former president of a major state-run bank, is expected to be put in charge of re-energizing finance and banking reforms that have stalled in recent years.

Wang appeared at the news conference, but did not speak.
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