China must lift price freeze: experts

BEIJING (Reuters) - China should remove price controls introduced to curb inflation as they will deter production and may lead to shortages, economists said on Sunday.

China capped or froze prices on a range of daily necessities late last year to try to tame inflation, now at an 11-year high, and to lower expectations that prices would keep rising.

"Price controls will discourage production, which will lead to less market supply and work counter to the government's efforts to curb inflation," said Zhou Qiren, a senior economist at the Chinese Centre of Economic Research at Peking University.

The authorities must instead control money supply, which is the ultimate source of inflation, Zhou told a financial forum.

Song Guoqing, another Peking University economist, agreed that price controls were counterproductive. He said rising inflation was a currency phenomenon.

"China's monetary policy should target inflation and the central bank should do whatever is needed to dampen inflationary expectations," Song told the forum.

Although the government had promised to redouble efforts to fight inflation, what it had done was far from enough, he said.

Song said allowing the yuan to rise even faster than it has, say by more than 10 percent a year, would greatly reduce inflationary pressure in China.

Beijing let the yuan CNY=CFXS rise 6.9 percent in 2007. It has strengthened by more than 2 percent so far this year.

The government should not readily relax policies aimed at cooling the economy just because it fears the impact of the global economic slowdown that is now unfolding, he said.

"It's better to err on the side of caution. Over-tightening is better than seeing inflation gradually climb to uncontrollable levels," Song said.

Justin Lin, who will take over as World Bank chief economist in May, said there was no need to worry about a Chinese slowdown either because of weaker U.S. growth or because of an investment downturn following August's Olympic Games in Beijing.

Chinese banks had only very small exposure to U.S. subprime mortgages, virtually ruling out a direct fallout on the domestic financial markets, he said.

What's more, China's exports to the United States were mainly for everyday use, limiting their vulnerability to a cutback in discretionary consumer spending, Lin said.

He also said Olympics-related capital spending was small in relation to the size of the economy. China, moreover, would host other international events requiring investment, while demand for better infrastructure across the economy was very strong.

Zhu Baoliang, a senior researcher with the State Information Centre, a government think-tank, said annual GDP growth would slow to 10.2 percent in the first quarter, from 11.2 percent in the fourth quarter of last year, but would then pick up and average 10.5 percent for all of 2008.

But he said consumer inflation would accelerate to more than 5 percent in 2008 from a year-average 4.8 percent in 2007.

(Reporting by Eadie Chen; Editing by Alan Wheatley)