Imported inflation stemming from the conflict in West Asia will put pressure on China’s economy, requiring policymakers to juggle rising inflation alongside slowing growth, according to a Chinese central bank advisor.
While consumer inflation remains subdued and provides some buffer, the extent of the impact will depend on how long and how severely the conflict drags on, said Huang Yiping, a member of the monetary policy committee at the People’s Bank of China (PBOC), at a media briefing in Beijing.
Highest Consumer Inflation
In February, China’s year-on-year consumer inflation rose to the highest in more than three years to 1.3%, but remained below the government’s 2% target for the full year.
“What I am worried about the most is the shock to companies’ profitability from rising oil prices, as the squeeze would be very adverse for the real economy,” Huang said.
Monetary policy has a limited scope to offset imported inflation; however, a policy response is certain if price increases become widespread, he added.
“We will have to balance between the rising inflation and the downward pressures on economic growth.”
PBOC Governor Pan Gonsheng said that the central bank will maintain an “appropriately loose” monetary stance, deploying tools including reserve requirement cuts and interest rates to keep liquidity ample.
Household Consumption
China’s five-year plan, released earlier in March, has pledged to “significantly” raise the share of household consumption in the economy over the next five years from approximately 40% currently, but it has stopped short of setting a specific target.
Huang stated that experiences of Japan and other Asian economies have shown that increasing the consumption component of an economy is a gradual process, especially in economies that are export-oriented, where income growth may not be fast enough to drive a rapid shift.
China’s consumption share of gross domestic product, which encompasses household and government consumption, has risen to 57% from a drop in 2010, though that remained well below the global average at about 75%, according to Huang.
“Rebalancing has been underway for more than a decade, but it is still not sufficient, and the process is continuing,” he said. “From a broader perspective, the pattern of strong supply and weak demand has yet to be fundamentally resolved.”
Huang said he hoped consumption’s share of the GDP could rise by around one percentage point every year over the next five years.
(With inputs from Reuters)
