But analysts say rate hike needed to tackle inflation

BEIJING - The trend of surging food prices, which account for more than one third of the consumer inflation basket, softened in late November after authorities took measures to curb inflation.

But some analysts warned that the respite is only temporary and high inflation will remain if the government relies on just administrative measures and does not significantly raise interest rates.

The government introduced a series of measures, including subsidies, ensuring supplies and punishing hoarders, to control rising prices in November.

From Nov 22 to 28, average wholesale prices of 18 kinds of vegetables declined 5.9 percent week-on-week, compared to a 2.6 percent drop for the previous week, according to data released by the Ministry of Commerce on Wednesday.

Average wholesale prices of eight kinds of fish products declined by 0.1 percent in the same period week-on-week. Price increases were seen in edible oils, rice and eggs, but were moderate compared with the previous weeks in November.

In Beijing, vegetable prices decreased 19 percent month-on-month by the end of November, Liu Tong, head of statistics at Xinfadi market, the largest agricultural commodities wholesale market in the city, told China Daily.

"Growing supply is gradually sending prices back to last year's levels," he said.

"The figures showed that measures taken by the government to broaden the vegetable supply and crack down on hoarding and other illegal speculative activities have worked," said Hu Shaowei, economist with the State Information Center.

Hu Bingchuan, researcher at the Rural Development Institute of the Chinese Academy of Social Sciences, said growing production capacity, a major factor cooling down food prices, was mainly due to market behavior. But he admitted that administrative measures had helped ease price hikes.

The State Council, China's Cabinet, on Nov 20 ordered local governments to take steps to rein in surging food prices.

Local authorities were encouraged to boost production to ensure supplies were adequate, while checking irrational demand and punishing illegal activities that pushed prices up. Other measures included reducing the cost of agricultural products and providing temporary subsidies.

"Hot money" in the agriculture futures market reacted dramatically to the government's regulatory measures, said analysts.

Within four days since Nov 15, 25 percent of the total capital flowed out of the three major futures exchanges in the country, analysts said. And prices of more than half of the commodities in the market dropped to their lowest point that week.

But Dong Xian'an, chief economist with Industrial Securities, said there is still no evidence showing inflation has been kept at bay.

"In the long term, the government's measures may not necessarily lead to an increase in the supply of goods in the market. If the government stic ks to administrative intervention, the situation could get worse in the coming months," he said, suggesting that the government should raise interest rates to increase the financial costs of market speculation.

He predicted food prices could rise by about 12 percent year-on-year in November, and the country's CPI could increase to as high as 4.7 percent before slightly weakening in December.

Li Wei, economist with the Standard Chartered Bank, said even if the figures show some decline in CPI growth in December, it might still remain higher than 4 percent.

"Unless agricultural productivity can be improved significantly, rising demand for products cannot be simply curbed by administrative measures," he said, adding that insufficient investment from the government in agriculture is a key factor in rising prices.

China's CPI surged 4.4 percent in October from a year earlier, reaching a 25-month high, stoking inflation fears.

The central bank has raised the reserve requirement, or proportion of money banks must keep as reserves, twice, each by 50 basis points within nine days in November to soak up excess liquidity and check inflation, after an interest rate hike by 25 points for the first time in three years.

source:China Daily