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China banks on policy, crops to fight inflation
May 5, 2008 / 9:59 AM / 9 years ago

China banks on policy, crops to fight inflation

MADRID (Reuters) - China’s Vice Minister of Finance said on Monday fighting inflation was a key priority and Beijing would tighten monetary policy and boost agricultural production to combat hikes in the price of food and oil.

“Fighting against inflation is a major task and certainly we will apply a lot of policies,” Li Yong said in a presentation to delegates at the Asian Development Bank’s annual meeting.

“We will have tight monetary policy. You will see lots of action. We will reduce money supply, the investment ratio and other monetary policy instruments to meet the (inflation) target.”

“In fiscal policy, we will push ahead with agricultural production to allocate more resources to help farmers grow more grain,” Li said, adding that government expenditure on the agricultural sector would grow an average 20 pct this year.

China has an inflation target of 4.8 percent this year, but first quarter consumer price inflation surged to 8 percent.

Li said the rise in food prices was a major concern for Beijing but was upbeat on prospects for this year’s harvest, which he said would surpass the average annual output of the last four years.

“We have little to do in terms of the global price hikes in grain and oil. But the good thing is our agricultural sector is strong. We have strong grain reserves and policies that support the agriculture sector.”

CONSUMPTION, EXCHANGE RATE

Li said Chinese domestic consumption would continue to rise supported by government social spending.

“Last year, consumption (levels) exceeded that of investment for the first time in seven years. It’s a shift from an economy driven (mainly) by exports to an economy driven by investment, export and consumption,” he said.

Chinese exporters are also grappling with rising raw material and labor costs, spurring some to relocate manufacturing operations to neighboring countries, Li said.

“This is very natural,” he said, adding that companies would have to move up the value chain.

Li said China would continue to move towards a more flexible exchange rate regime as part of its financial sector reforms, noting that its yuan currency CNY= had already appreciated 18.4 percent against the U.S. dollar since July 2005 when it abandoned its peg to the greenback.

“We will move steadily but sudden and too big a volatility will damage the economy,” he said.

China’s economy grew 11.7 percent last year and its strongest expansion in the recent decade has stoked fears of economic overheating.

But putting a brake on foreign inflows to slow inflation was not an option, Li said. Instead, the government will enhance its ability to monitor capital flows.

“(Capital) inflow causes inflation but an outflow has more negative implications on economy,” Li added.

The country is targeting economic growth of around eight percent this year, though most economists expect it to slightly exceed that level. Li acknowledged it was possible that growth would exceed the 8 percent target.

“My projection is it will be more than 8 percent anyway,” Li said.

Reporting by Sebastian Tong; editing by Nick Edwards

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