Too light on the tightening

China inflation: It is time China grasped its inflationary nettle. Consumer prices rose 4.4 per cent in October, measured year on year, a whisker away from the level a noted academic has recently spoken of as China's danger zone. Put more scarily, if last month's rate continued for a whole year, prices would rise 11 percent. Officials are already starting to hark back to the bad old days of the inflationary 1990s.

There are three reasons inflation has set in. The first is an abundance of money. China's monetary expansion puts the US Federal Reserve's much criticised quantitative easing to shame. China's banks have issued $1 trillion of new loans so far this year, roughly the same amount per month as the Federal Reserve is planning to inject into the financial system.

Rising import prices are making things worse. China's currency, tethered to the dollar, has fallen in trade-weighted terms, worsening the effect of already climbing food and energy costs. Meanwhile, as the yuan gets cheaper, foreigners are drawn to Chinese exports. So manufacturers are liable to rev back up, increasing the risk of the economy overheating.

It isn't too late to act. Higher interest rates would be a start. They were hoisted by 0.25 per cent last month, but that achieved little. Inflation is still far higher than the 2.5 per cent rate banks pay for one-year deposits, meaning the real interest rate is negative. In an economy where GDP is growing at 10 per cent, rates could comfortably be twice what they are now.

Currency appreciation looks a necessity too. That would make imports feel cheaper, and check the export sector. Despite the biggest one-day appreciation in years this week, the yuan is just three per cent stronger against the dollar than it was two years ago. Another three per cent by year-end might be more appropriate.

Beijing has largely shied away from both of these options, with some cause. Higher rates attract speculators. A stronger yuan can cost exporters jobs. But runaway prices are a far more real and dangerous enemy in economies prone to social instability. October's data shows the problem is not going away, and the longer policymakers wait, the worse the sting will be.