BEIJING — Chinese Premier Wen Jiabao said Monday that the U.S. policy of “quantitative easing” is partly to blame for China’s inflation problem, and that this country is not alone in the world in facing fast-rising consumer prices.
In his annual news conference with Chinese and international reporters at the close of the National People’s Congress, Wen was pointed in his responses on inflation, potentially the most dangerous trouble spot in China’s economy. Though he didn’t name the U.S. specifically, he pointed to what he and some economists call quantitative easing “by certain countries” as a main driver of global inflation. Quantitative easing is a tool by which a central bank increases the money supply to buy up securities. Federal Reserve chairman Ben Bernanke has called the program “credit easing,” which he and economists have said differs from quantitative easing because instead of the Fed creating money to make the purchases to buy back government debt, it’s using it to buy private sector assets.
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Wen also noted unrest in North Africa and the Middle East has also driven up oil prices, and that world grain prices have increased by 15 percent in the past year.
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“Inflation is like a tiger,” said Wen. “Once it’s set free, it’s very difficult to get it back in the cage.”
But the premier acknowledged that China’s structural economic problems have exacerbated inflation. The country has witnessed record inflation rates in the past 18 months, particularly in consumer prices on housing and food. Wen said fast-rising labor costs are partly to blame, as are weak spots in the economy.
“We must not take this issue lightly,” he said.
In response to inflation concerns, China will boost its own agricultural production, increase the food distribution system and “maintain good market order” to manage inflation expectations. Housing prices are keys in the mix, and mopping up excess liquidity critical to tempering rising prices. Consumer prices rose again by 4.9 percent in China last month over the previous year, far above the rate the government considers acceptable. Wen warned that increases in the consumer price index are apt to remain high in the first half of this year.
He said the central government will put more pressure on local government to control housing and food prices, decentralizing some of the controls and hoping for a new outcome, and that tempering rising consumer prices is critically important to “maintaining social order” in China.
The premier touched on the contentious issue of China’s currency, saying the country “will continue to pursue our reform of the exchange rate regime.” The yuan has risen in recent weeks, after basically two years of no movement and cries from the United States and other trade partners of unfair trade advantages from an artificially low currency rate. Wen said the yuan has risen 57.9 percent against the dollar since 1994.
“Our practice has been to de-peg the Chinese yuan from the dollar and move toward flexible market valuation,” Wen said.