China's Wen says inflation top priority, more tightening seen

By Kevin Yao and Yan Jiang

SHANGHAI/BEIJING (Reuters) - Fighting inflation remains the top priority for the Chinese government and Beijing will maintain its current economic policy, Premier Wen Jiabao said in comments published on Monday, reinforcing the case for further policy tightening.

Wen's comments followed official data on Saturday that showed annual inflation in June hit a three-year high of 6.4 percent.

"We must treat stabilizing overall price levels as the top priority of our macro-economic controls and keep the direction of macro-economic adjustments unchanged," Wen said in remarks reported by the central government's Internet portal: (

He said that the government would try to stabilize prices of pork, a staple meat on Chinese dinner tables and the most closely watched item in inflation control, by boosting the supply of hogs.

Meanwhile, China's central bank chief Zhou Xiaochuan vowed to maintain a "prudent policy" to fight stubbornly high inflation, while adding that it would try to avoid causing big swings in economic growth.

"The most prominent problem in macro-economic operations is the relatively big inflationary pressure and still strong inflationary expectations," Zhou wrote in the latest edition of China Finance magazine, published by the People's Bank of China.

The acceleration in Chinese consumer inflation in June, which was driven by rising food and property costs, revived expectations of more interest rate rises in the next few months and rattled Asian stock and commodities markets, even as other data pointed to some cooling in its robust economic growth.

"We must make it more prominent and important to maintain basic stability of the overall price level, and pay attention to price stability in a wider scope," Zhou said.


Zhou also said that the central bank would work to "avoid big fluctuations" in the economic growth, indicating some concerns over downside risks to the economy.

"We should implement prudent monetary policy in a pro-active and safe way to handle the relationship between maintaining stable, relatively fast growth, adjusting economic structures and managing inflationary expectations," he said.

China's import growth fell to its slowest pace in 20 months in June while export growth eased, evidence of the broad impact of the monetary policies that have weighed on economic growth and of growing sluggishness in the global economy.

Still, China will switch its policy focus from curbing inflation to supporting growth in the second half, said Liu Yihui, a researcher with the Chinese Academy of Social Sciences, a top government think tank.

Any policy relaxation now would ignite worries about stagflation in the fourth quarter, Liu added.

Inflation will probably peak in July and ease thereafter to about 4 percent toward year-end, and the central bank needs to fine-tune its policy to lean more on interest rate rises to check inflation and pull real deposit rates out of negative territory, Liu told the official China Securities Journal.

Separately, Xia Bin, a central bank adviser, told the China Securities Journal that Beijing needs to use a combination of policy tools, including interest rates, currency moves and open market operations as well as changes in banks' required reserve ratios.


Many analysts expect the central bank to lean more on interest rates to fight inflation in coming months, partly because there is limited room for it to raise bank reserve ratios further.

"We will use more market-oriented tools and means to maintain necessary controls on liquidity, while maintaining a reasonable amount of social financing to avoid big fluctuations in economic growth," PBOC chief Zhou said.

Zhou's remarks indicated the central bank is trying to shun heavy-handed credit controls and could lean more on conventional policy tools, such as interest rates and currency, analysts say.

The central bank has relied heavily on raising bank reserve requirement ratios to mop up excessive cash in the economy, increasing the ratio nine times since October to a record high of 21.5 percent. It also has raised interest rates five times since then.

"The market-oriented tools, which oppose to administrative measures, typically include interest rates and exchange rate. Bank reserve ratios are more market-oriented than direct lending controls," said Gao Shanwen, chief economist at China Essence Securities in Beijing.

Gao is a former government researcher and once worked at the central bank.

($1 = 6.465 yuan)

(Additional reporting by Zhou Xin, Lu Jianxin and Carrie Ho; Editing by Jonathan Hopfner and Ken Wills)