Ever fearful of inflation's historic potential to spark unrest in China, the government has ordered a range of steps to ensure supplies of key goods, offer financial help to the needy and vowed to impose price caps if necessary.

The government said it would increase supplies of grain, energy, sugar and other key items to stabilise prices and ease growing consumer fears.

Prices of some vegetables have rocketed more than 60 percent this year and inflation hit a two-year high of 4.4 percent in October, largely due to soaring food costs and above the government's official full-year target of 3.0 percent.

But economists consider price controls, such as those temporarily imposed in 2007 on basic foodstuffs, to be ineffective over the long term and say tougher action will be needed to contain prices.

Such measures "do something in the short term, but they will not work in the long term if they are not taken along with other economic measures such as monetary policy tightening", Beijing-based World Bank economist Louis Kuijs told AFP.

China last week ordered banks to raise the amount of money that they must keep in reserve -- the reserve requirement ratio -- to reduce the volume of credit flooding into the economy and fanning inflationary pressures.

The hike was the fifth this year and the second this month, and followed China's first increase in interest rates in nearly three years last month -- up 0.25 percentage points -- highlighting growing concern among policymakers.

But UBS economist Wang Tao said that to effectively combat inflation, the government should increase interest rates by a further 1.5 to 2.0 percentage points over the next 12 months.

It should also cut credit growth and stop injecting yuan into the economy in exchange for the dollars accumulated from China's booming export machine, Wang said.

Revaluing the currency would be another way for the central bank to print fewer yuan in exchange for the dollars or other currencies it receives through trade, analysts said.

But Beijing, despite intense pressure from its trading partners, has resisted calls for a steep appreciation of the tightly controlled yuan, which it says would endanger its export sector and tens of millions of jobs.

So far, policymakers have preferred to rely on raising banks' reserve ratio rather than hiking interest rates or appreciating the yuan, Matt Robinson, economist with credit ratings agency Moody's, said in a note.

Rate hikes and a rapid rise in the currency "would have more extensive impacts on the broader economy and risk greater social upheaval", he said.

Patrick Chovanec, economics professor at Tsinghua University in Beijing, said China faced "a massive expansion of more than 50 percent in money supply over the last two years that led to general price inflation".

But he said price controls "don't address the roots of the problem and introduce new distortions into the economy".

In response to the global crisis, Beijing unveiled a four-trillion-yuan (586-billion-dollar) stimulus package and opened the credit valves, which led to the volume of new loans nearly doubling to 9.6 trillion yuan in 2009.

These loans were mainly used to increase investments and caused a boom in property prices. Policymakers now fear a damaging bubble in the real estate sector and a potential new crop of bad debts.

"The monetary expansion over the past two years has been huge," said Wang at UBS.

The World Bank's Kuijs said he believed the government was on target to achieve its objectives but "there is still quite some leeway to raise interest rates further".

earlier related report
Hong Kong developers slam 'heavy' property cooling measures
Hong Kong (AFP) Nov 23, 2010 - Property developers on Tuesday criticised government measures to rein in Hong Kong's soaring property prices, saying they will scare off ordinary home buyers rather than wealthy speculators.

New World Development managing director Henry Cheng described the proposed measures, which include a sharp hike in stamp duty, as "a strong dose" that will do as much harm as good.

"In the process of warding off speculators, genuine buyers and those with low incomes will be affected. They're getting the wrong guy. These measures do not fit with the government's aim to help the common folk," he told AFP.

Hong Kong's Financial Secretary John Tsang Friday unveiled a package of measures to restrain runaway property prices in the densely populated former British colony, which is favoured by super-rich mainland Chinese investors.

In an attempt to discourage property speculation, as of the weekend anyone reselling a property within six months of purchase is subject to a 15 percent stamp duty.

A 10 percent duty applies to sales between six and 12 months and five percent between 12 and 24 months.

The head of the Hong Kong Monetary Authority, the city's de facto central bank, also outlined measures that limit the availability of mortgages.

The move followed public anger in the city -- which is traditionally associated with laissez-faire policies -- and a warning from the IMF of a potential bubble.

The measures appeared to have an immediate impact even though they have yet to be passed by the city's lawmaking body, the Legislative Council, with secondary residential home sales plummeting over the weekend.

Ricacorp, one of Hong Kong's largest real estate agents, said sales had fallen by 70 percent on Saturday and Sunday compared with the previous week.

"These measures are not necessarily suitable to Hong Kong," New World's Cheng said, adding that the shortage of land and housing in the city was at the heart of the problem.

DBS Vickers sales director Peter Lai told AFP he expects property transactions to shrink by at least 20 percent in the coming months and real estate prices to drop 10 percent.

"These heavy measures will have an immediate impact, we have seen that happening already, the property market is cooling down significantly," he said.

"I anticipate the effect will be more pronounced in the short run. Issues including shortage in land and housing supply still need to be addressed in the long run."

Real Estate Developers' Association vice-chairman Stewart Leung echoed Cheng, saying end users will suffer from the new measures, local paper The Standard reported.

The measures to help cool the market were felt on the Hong Kong stock market, where shares fell 2.67 percent Tuesday, with global market tremors and tensions on the Korean peninsula also weighing, traders said.

The benchmark Hang Seng Index lost 627.88 points to close at 22,896.14 on turnover of 92.24 billion Hong Kong dollars (11.89 billion US).

Among Hong Kong developers, Cheung Kong dropped 4.46 percent, Sino Land 3.77 percent and Sun Hung Kai Properties 3.31 percent.

Midland Holdings, the owner of Midland Realty, one of Hong Kong's largest real estate agencies, slumped 5.09 percent.

del.icio.us	Digg	Reddit
YahooMyWeb	Google	Facebook

Memory Foam Mattress Review

SPACE MEDIA NETWORK PROMOTIONS Solar Energy Solutions Tempur-Pedic Mattress Comparison ... Newsletters :: SpaceDaily :: SpaceWar :: TerraDaily :: Energy Daily XML Feeds :: Space News :: Earth News :: War News :: Solar Energy News