Is China winning its battle against inflation?

BEIJING - China's consumer prices have dropped for four consecutive months since peaking this year, somewhat easing consumers' nerves. But the battle against inflation seems far from over.

Wu Shu earns around 6,000 yuan ($949) a month and doesn't have much leftover after paying rent, buying food and getting clothing. Despite price drops in recent months, he hopes prices will drop more.

"After all, prices have gone up too much in the last two years," he complained.

Wu works in a Beijing-based information technology firm, and quite a few of his colleagues have moved from downtown to the city's suburbs in order to cut rent costs.

According to a blue book published by the Chinese Academy of Social Sciences (CASS), 70 percent of the surveyed Chinese urban and rural residents said they felt the pressure of rising prices has affected their lives over the past year.

Changes in the Consumer Price Index (CPI), a main gauge of inflation, will take the shape of an inverted V this year, but it's still too early for the country to drop its guard against inflation considering the current price level, rising domestic costs and a grim global outlook, analysts said.

The CPI eased to 4.2 percent in November from the year's peak of 6.5 percent in July. It hit 5.5 percent year-on-year during the January-November period, well above the government's full-year target of 4 percent.

"The difficulties in taming inflation will largely come from external situations, which are uncertain and uncontrollable," said Peng Xingyun, a researcher at the Institute of Finance and Banking under the CASS.

The loose monetary policies adopted by developed economies, the debt crises in the EU and the United States, as well as rising global commodity prices have pushed up imported inflation for China and put the country's macro control in an adverse environment, Peng said.

The U.S. Federal Reserve has maintained near-zero interest rates for three years and promised to keep the levels at least through mid-2013, while the European Central Bank on Dec. 9 lowered its key interest rate to a record low of 1 percent following the 25-basis-point drop last month.

Meanwhile, domestic factors, including rising labor costs caused by demographic transition, higher resource prices due to resource price reforms and reduced land areas as a result of rapid urbanization, will continue to work on the market and push up consumer price levels in the mid- to long-term, said Lian Ping, chief economist at the Bank of Communications.

While projecting next year's CPI between 3 percent and 3.5 percent, Lian said inflation will not be a primary issue for the nation's macro economy in 2012, but warned that a large-scale policy loosening may cause prices to bounce back.

Zuo Xiaolei, chief economist at Galaxy Securities echoed Lian's views, saying that "if the ongoing drops in prices are seen largely as results of government control efforts (rather than the market's regulation), these efforts should not be relaxed next year."

China has made controlling prices a top priority this year and implemented a series of measures to address the issue, including tightening monetary policy, cracking down on speculation, increasing food supplies and reducing circulation costs.

In a statement issued after last week's central economic work conference, the nation recognized that it faces both an economic slowdown and inflationary pressure and vowed to continue using comprehensive measures to stabilize prices and avoid price rebounds.

But it will be a delicate job for the world's second largest economy to stabilize growth while avoiding retriggering inflation, as the economy has been decelerating all year.

Due to government tightening efforts and weakening external demand, China's GDP growth slowed to 9.1 percent in the third quarter from 9.5 percent and 9.7 percent in the second and third quarters, respectively.

"China's economy is like an auto that runs at a high speed but tries to make a turn. It will need multilateral coordination, including stepping off the accelerator, turning the steering wheel and even braking occasionally," said Wang Dan, a researcher at the Development Research Center of Shanghai's municipal government.

The government's price controls can only hold the inflation tiger in a cage temporarily. What's needed to tame the beast is a major growth model transformation, though reducing the country's dependence on investment and exports is hard in the short run, Wang said.