BEIJING (XFN-ASIA) - Inflationary pressures in China are increasing and may not ease in the short term, the central bank said in its second quarter monetary policy report.
The People's Bank (nasdaq: PBCT - news - people ) of China (PBOC) said the trend towards economic overheating is becoming more apparent, reiterating the government commitment to 'moderately tighten monetary policy.'
It noted the difficulties in bringing down meat and grain price inflation in the short term and said that it remains on guard to watch if food price inflation spills out into other consumer goods, as well as energy, resources and labor costs.
Meat, particularly pork, and grain prices drove consumer price inflation (CPI) in June to its highest level since September 2004 at 4.4 pct year-on-year.
Most economists expect July CPI, which will be announced on Monday, to top 5.0 pct.
The PBOC said it still maintains its aim to control inflationary expectations and keep prices 'basically stable.'
It also reiterated its pledge to keep the yuan exchange rate 'basically stable at a reasonable and balanced level,' and cited economic theory suggesting that currency appreciation is an effective anti-inflationary measure.
The report added that the trade surplus will remain high in the second half of the year.
China recorded a trade surplus of 112.53 bln usd for the first half, with the June surplus at 26.91 bln usd, the highest monthly level since 2006.
The PBOC added that protectionism is 'unhealthy' for the world economy, noting the various articles of currency legislation working their way through the US Congress.
The bank said it will strengthen liquidity management using tools such as more reserve requirement hikes.
It said it will also steadily expand the Qualified Domestic Institutional Investor (QDII) scheme, launched last year to facilitate capital outflows from the mainland.
The bank acknowledged that to curb the widening of its trade surplus, China needs to also increase demand and adjust preferential policies for foreign investment and market opening.
The National Bureau of Statistics is expected to begin releasing July economic data later this week, with the producer price index (PPI) due out on Friday.
Source : http://www.forbes.com/markets/feeds/afx/2007/08/08/afx3998341.html
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