Putting the lid on inflation

Slower economic growth, better control of liquidity and changes in product structure will help tame rising prices

China's new round of inflation pressures is a combination of a variety of complicated internal and external, short-term and long-term factors.

While China's economy was hit by the global financial crisis, it quickly regained momentum following a series of stimulus packages and its average annual growth rate was 11.2 percent over the 11th Five-Year Plan (2006-2010) period.

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But in order to fend off the harmful effects of the global financial crisis, China has pumped a large amount of monetary supply into the market over the past two years, brewing excessive liquidity in its economy.

Statistics show that the country's total financing volume, an important index to measure market fluidity, amounted to 15.1 trillion yuan ($2.3 trillion) in 2009 and 14.6 trillion yuan in 2010. This huge scale of financing is yet to unfold its full influence on the current level of prices, although the Chinese government has adopted a series of macroeconomic measures to tame inflation.

At the same time, liquidity in the global market has also caused speculative international hot money to flow to China, which, together with its large trade surplus and bulging foreign reserves, has resulted in a large scale of excess liquidity in the domestic market.

Imported inflation has been a leading external factor fuelling China's inflation pressures. China is currently highly dependent on the import of some bulk commodities, especially energy and some primary raw materials, to fuel its fast-growing economy. It is more than 50 percent dependent on imports of oil, bronze and iron ores.

Since last year, prices of some bulk commodities have continued to rise in the international market with the considerable depreciation of the dollar, the resumption of global demand, excessive global liquidity and political turbulence in the Middle East, leading to increased import costs that further push up China's consumer price index (CPI).

The nation's accelerating urbanization and its pricing reforms have also served as middle- and long-term factors affecting China's ever-growing inflation pressures.

As the result of its rapid urbanization, the country's costs of labor, land, energy and other materials have continued to rise in recent years.