Less impact?

However, economists say they fear the impact of the price-control measures will be limited and are instead calling for more stringent monetary policies, such as a rise in interest rates and a currency appreciation.

Wang Qing, an expert with global financial services firm Morgan Stanley, estimated that China's consumer price index will rise in the first quarter of 2011, hitting a peak of 5.5 percent year-on-year by mid-year, before slowing to four percent year-end.

"If Chinese authorities rely mainly on administrative controls on monetary aggregates to handle inflation instead of allowing price-based policy instruments, such as rate hikes and yuan appreciation, the risk of a policy-induced boom and bust cycle would increase."

Authors of a report released by the Royal Bank of Scotland agreed and said that the recent government measures are "aimed more at profiteering".

"The measures are unlikely to curb inflation (of food prices). Prices continued to rise in 2008 even after similar controls were introduced," reads the report. The analysis states that, after a decade of 2-percent inflation and 10-percent GDP growth, on average, the Chinese economy has grown "accustomed to low inflation and low rates".

A higher rate of inflation means the authorities will have to "raise policy rates, rather than selectively tighten regulatory policy", the report adds.

Shoppers also appear to be short on optimism. A joint report by Nielsen, the global market researchers, and the National Bureau of Statistics' economic monitoring and analysis center, shows that, in the three months ending September, China's consumer confidence index fell for the first time in six quarters.

About 76 percent of consumers expect prices to keep rising over the next 12 months, up 70 percent on the previous quarter.

In Fuzhou, residents have even started to grow their own vegetables to save money. Official statistics show food prices in Fujian rose 9.7 percent in October compared to 2009. Vegetable prices were up more than 30 percent.

Chen Yibo, who runs a salvage station in Helin village, collected every discarded bathtub he could find, filled them with soil and planted cabbages, chives and eggplants.

"Had it not been for the fact we can't afford vegetables, I'd never have imagined this waste could be used to grow food," he said, smiling. He guards his bathtubs day and night to prevent his vegetables from being stolen.

'Strong tailwinds'

Wang Qing at Morgan Stanley said he believes 2011 will be the "year of reflation" for China's economy, as the post-economic crisis normalization and rebalancing continues.

The central government pumped record 9.6 trillion yuan in low-interest credit into the economy in 2009 and was expected to advance another 7.5 trillion yuan this year.

"The lagged effect of (that) massive monetary expansion is expected to go on providing strong tailwinds for inflation," said Wang Qing.

The loosening of monetary policies by some developed nations, including the United States and Japan, is also likely to push inflation in China to a new high.

Earlier this month, the US announced it will print $600 billion in government bonds to rescue its economy, known as quantitative easing. The move is expected to result in a huge influx of hot money into emerging markets, including China, which will boost the prices of many commodities.

"It is unavoidable and reasonable for China to appreciate its currency at a moderate and mild pace to fend off the negative impact of hot money from overseas," said Ba Shusong, senior economist on finance for the State Council's Development Research Center.

The annual central economic working conference will be held in December and controlling inflation is widely expected to be at the top of the agenda. Media reports citing unidentified sources have suggested officials at the conference could set a higher inflation target of 4 percent for 2011.

"(The central government) will use quantitative tools and price tools to manage liquidity," assured Hu Xiaolian, deputy governor of the central bank. "It will also control the pace of bank lending in the remaining two months of this year."

(China Daily November 30, 2010)