China targets liquidity as inflation quickens

Chinese Central Bank Governor Zhou Xiaochuan said China is under “pressure” from capital inflows as a state newspaper said price controls could be imposed to cool the fastest inflation in two years.

Zhou reiterated government goals of “moderate” credit growth and stronger liquidity management at a forum in Beijing today. The China Securities Journal said price limits are possible for food, citing unidentified sources.

The Shanghai Composite Index tumbled 4 per cent today, after a 5 per cent plunge on November12, amid speculation that surging inflation may trigger more monetary tightening. Capital flowing into China because of easing in developed economies and speculation that the yuan will appreciate adds to money already in the financial system from record domestic lending.

The Federal Reserve’s decision to buy $600 billion of Treasuries came as China raised benchmark lending and deposit rates for the first time since 2007. October’s inflation rate of 4.4 per cent was higher than any of the estimates in a Bloomberg News survey of economists.

UBS AG said November 11 that the government may set next year’s new lending target at about 7 trillion yuan ($1.1 trillion), down from 7.5 trillion yuan this year. Credit Suisse Group AG has said the goal may be 5 trillion yuan.

Punishing speculators
Some emerging economies have grown quickly and face “pressure” from capital inflows as growth in developed nations has slowed, Zhou said. Rising prices in China need attention and officials should “strengthen liquidity management and maintain moderate growth in credit and money supply,” he said.

China may impose price limits on food and toughen punishment of those found speculating on agriculture futures including corn and cotton, the China Securities Journal reported, citing an unidentified person.

The government may also crack down on hoarding, offer food subsidies and hold local mayors responsible for ensuring vegetable supplies and controlling prices, the report said.

Vegetable prices
Corn prices in China jumped to a record today as tightening supplies increased their investment appeal. Rice also reached an all-time high. China has already sold sugar, cotton, corn, aluminum and zinc from stockpiles to ease supply shortages.

Vegetable prices in the first 10 days of this month jumped 62.4 per cent from a year earlier, the Financial News reported today, citing a survey by the Ministry of Commerce. Prices have also jumped 11.3 per cent from the start of this year, according to the newspaper published by China’s central bank.