China’s National Bureau of Statistics reports consumer prices rose 3.6 % y-o-y in March. Although inflation accelerated slightly from February, the pace of inflation was well below 2011 levels (as recently as last September inflation was running above 6 % y-o-y). The lion’s share of inflation was driven by rising food prices, while non-food prices increased only modestly. China has an official 4 % inflation target this year − a target generally considered realistic. Producer prices were lower in March compared to a year earlier, so they exert no inflationary pressure on consumer prices.
Falling inflation and weakening growth prospects gave the National People’s Congress this March sufficient latitude to declare a shift in the emphasis of economic policy this year from inflation-fighting to bolstering economic growth. To stimulate economic growth, the People’s Bank of China has eased lending guidelines for commercial banks and lowered reserve requirements for all commercial banks by a half-percentage-point in both December and February. The PBoC announced last month it was lowering the reserve requirement for over 500 bank branches that deal with providing finance for the agricultural sector.
Although the PBoC has not adjusted reference rates since last July, in public there has been discussion about lowering reference rates and even phasing out interest-rate regulation altogether. By setting a ceiling on deposit rates and a floor on credit rates, the PBoC currently guarantees commercial banks a minimum profit margin. Such rate regulation reduces the possibilities of banks to compete. This practice is rare elsewhere in the world, as is the Chinese practice of setting branch-specific reserve requirements. China is finding that such micromanaging of monetary policy is increasingly difficult as it proceeds with market reforms.
Inflation and key monetary policy instruments, %
Sources: NBS and PBoC