Gov't response

Just a day ahead of Wen's remarks delivered over radio, China's central bank announced on Dec. 25 that it would raise the benchmark interest rate by 25 basis points, effective from Dec. 26. It was China's second raise of interest rates since October 2010.

The country also increased bank reserve requirement ratios six times in 2010.

These steps, according to officials, were taken to target inflation by mopping up excessive liquidity on the market.

Also, China had announced a shift to a prudent monetary policy from a previous moderately loose one to tackle rising inflation and keep economic growth at sustainable pace.

Wen told radio listeners that the country's overall price level started to drop, especially of major consumer goods, one month after the State Council's introduction of a package of price-stabilizing measures.

The State Council on Nov. 20 ordered stepped-up efforts made to contain inflation, by increasing the supply of agricultural products, intensifying the crackdown on speculation, hoarding and price-gouging, as well as offering low-income earners subsidies to make up for price rises.

Wen said inflation expectations were more dire than inflation itself, urging people to remain confident that the government will manage to keep prices at a "reasonable" level.

"The fundamental way to stabilize prices is to achieve a balance of supply and demand, which requires continuous development of agriculture," Wen said, adding that the government has worked out measures to boost agricultural production.

Bao Minghua, a professor with Renmin University of China, said that excessive liquidity mainly caused the price hikes, adding that seasonal changes in the output of some agricultural products, and the increase of raw material prices on the international market, also played a role.

Li Jianwei, with the State Council's think-tank, told Xinhua that the past several years saw surging prices, of which food price rises contributed the most growth.

"Our research indicates that the main reason behind the price hikes is the increasing costs," Li said. "These include rising labor costs, increasing agricultural raw materials and equipment expenditures, and higher transportation costs, which have been driven by fuel price hikes."

Admitting that price speculation played a role in boosting the prices of some specific agricultural products, such as garlic, ginger, and mung bean, as well as others, Li said this factor could only have a limited impact on the CPI.

Li added that the grain price rises that were mainly caused by increasing costs should be tolerated to an extent, but added that he expected the growth rate of grain prices for 2011 to be lower than 2010.

He said the pressure to drive prices higher in 2011 would come mainly from imported inflation, and the rising prices of imported raw materials, like fuel and ore, could boost industrial products' prices and thus, indirectly, affect agricultural materials' prices.

Li urged the government to maintain a balance of stabilizing prices of agricultural products and ensuring farmers a reasonable level of profit.

"I am confident that with all the measures well implemented, the government will be able to achieve the goal of containing surging prices," Li said.

(Xinhua News Agency January 4, 2011)