Premier says China faces inflation pressure and risk of drastic fluctuations

Joe Mcdonald, THE ASSOCIATED PRESS
BEIJING - China's premier warned Tuesday the country faces more pressure for already high inflation to accelerate but assured an anxious public Beijing can meet its target of holding price rises to 4.8 per cent this year.

The government must "strengthen and improve" macroeconomic controls and push ahead reforms of the state-owned banking industry, Premier Wen Jiabao said at a nationally televised news conference held at the end of China's legislative session.

"We are under mounting inflationary pressure. We also face the potential risk of drastic economic fluctuations," said Wen, the country's top economic official.

He said cooling inflation is Beijing's "top priority."

Inflation soared to 8.7 per cent in February, its highest level in nearly 12 years, driven by a 23.3-per-cent jump in food costs, despite price controls, fuelling concern about possible unrest.

The premier announced no new initiatives but said: "If we take the right measures, we are confident we can control the rise of inflation and price levels."

Communist leaders worry about a potential political backlash in a society where poor families spend up to one-half their incomes on food.

The sharp increase in prices, which began in mid-2007, has been blamed on shortages of pork, grain and some other food items. Non-food inflation is still low, with prices in February rising by 1.6 per cent over the same month last year. But government data indicate pressure for across-the-board price increases is growing.

Beijing has raised interest rates repeatedly to cool pressure for price rises amid a boom that is expected to see the economy grow by at least nine per cent this year after an 11.4-per-cent expansion in 2007.

China has the right conditions to control inflation, with a "general oversupply" of industrial goods and an ample 135 million to 185 million tonnes of government grain reserves, Wen said.

The government has been releasing grain at below-market prices to ease shortages.

Economists say Wen's 4.8-per-cent inflation target looks unrealistic as wholesale prices rise, increasing pressure for companies to pass on higher costs to consumers. Outside forecasts of full-year inflation are as high as 7.2 per cent.

Still, Wen said: "We have no plans to change this predictive goal."

"We believe that by setting this goal we have shown the resolve of the government to control price rises," he said.

"We also want to stabilize people's expectations for price rises."

The premier promised more market-style reforms to help control inflation.

"We need to strengthen and improve our efforts in macroeconomic regulation and we need to give full play to market forces in allocating resources," he said.

That will include reforms of the banking industry, he said, without giving details.

One of China's newly appointed vice-premiers, Wang Qishan, a former president of a major government bank, is expected to be put in charge of re-energizing finance and banking reforms that have stalled in recent years.

Wang appeared at the news conference with Wen but did not speak.

© The Canadian Press, 2008