China's central bank warns on inflation

China should be cautious against inflation, says Central Bank Governor Zhou Xiaochuan.

Story highlights

  • China central bank governor warns of inflation after large jump reported last week
  • Policy tightening in China could slow growth but keep prices and property market in check
  • Central Bank Governor is tipped to stay in office for stability during the leadership transition

China must be "on high alert" against inflation, central bank governor Zhou Xiaochuan said on Wednesday, striking a hawkish tone at his most important news conference of the year.

Speaking the week after China reported a jump in inflation to a 10-month high of 3.2 per cent, Mr Zhou said the increase in prices had been larger than expected and that experience had taught him not to delay the fight against inflation.

His comments were the latest sign that the Chinese government is willing to tolerate slightly slower growth in order to keep prices and the property market in check. After growing 7.8 per cent in 2012, its weakest year in more than a decade, China's economy is on track to grow more quickly this year, but policy tightening could limit the size of its rebound.

"In the past some of us thought it was no big deal if inflation was a little bit high, growth will be a little faster and then we can control inflation afterwards," Mr Zhou said at the central bank's news conference held during China's annual parliament.

"But international experience and our own experience here show that this thinking might not be correct. It requires careful attention to maintain low inflation," he said.

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Mr Zhou's comments put China at the opposite end of the policy spectrum from the US and Europe, where central banks have kept monetary conditions extremely loose in order to rev up sluggish growth.

The split with other central banks is not an ideological rift so much as an acknowledgment of China's very different economic reality, where even a moderate policy loosening last year led to a sharp rise in credit issuance, a pick-up in growth and, lately, the threat of inflation.

With property prices starting to soar, the government last month stepped up its controls of the real estate market, vowing to levy a 20 per cent capital gains tax to thwart speculators.

The central bank has also shifted towards a tighter stance in recent weeks, withdrawing cash from the economy via its open-market operations.

Mr Zhou, who has served as governor of the People's Bank of China for the past decade, has reached the mandatory retirement age of 65, but the government is widely expected to keep him in office for at least another year in order to bring policy stability at time when the country is going through a once-in-a-decade leadership transition.

Asked about the speculation surrounding his future, Mr Zhou refused to be drawn. "For the time being, even I am not clear about this," he said. "I believe that regardless of who is central bank governor, we will have continuity and stability in our policies."

Additional reporting by Emma Dong

      CNN Business

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