China is Making a Move to Manage the Inflation Expectations

The Chinese Monetary Policy report Q3 2010 published by People’s Bank of China on November 2 claims that the price trend in China seems uncertain and that the Chinese government still needs to strengthen the management of inflation expectations. 

The official statistics from the report suggest that China is now under pressure because of the rising inflation. In the last three quarters of 2010, China’s GDP reached RMB 26.9 trillion, marking an increase of 10.6% above the same period of last year. The CPI grew by 2.9% above the same period of the previous year.

By the end of September 2010, the balance of broad money supply (M2) in China was RMB 69.6 trillion, with a year-on-year increase of 19.0%. The balance of narrow money supply (M1) was 24.4 trillion Yuan, a year-on-year increase of 20.9%.

Now the total volume of currency issued by the Chinese government is almost 43 trillion Yuan according to Chinese Financial Weekly, but this dangerous financial situation could cause a strong influence on inflation expectations.

To control this situation, the report suggests that the government will keep applying moderately liberal monetary policy to soothe the transition.

In fact, the Chinese government already raised the bank interest rate on October 20 for the first time since 2007 to reduce the risk.
Wu Xiaoling, the deputy director of the NPC Financial and Economic Committee said: “From my point of view, Central Bank is telling the public they want to control the inflation expectations through rising interest rate, and this is a signal of appealing the currency policy come back to normal.”