Prudent policy should have 'teeth'

Morgan Stanley Asia chief: China's inflation cycle at a 'critical point'

BEIJING - China needs to convince the market that its shift to a prudent monetary policy stance has "teeth" by adopting tougher measures to combat accelerating inflation, Morgan Stanley Asia Chairman Stephen Roach said on Monday in Beijing.

"The inflation cycle in China right now is at a critical point," Roach said. "It is critical that the Chinese government delivers disciplined and comprehensive policies to address the problem."

"They've taken steps in that direction. But you need more than words to deal with the problem," he said.

China officially shifted its monetary policy stance from a moderately loose one to a prudent one on Friday as policymakers in Beijing stepped up efforts to tame rising inflation and head off asset bubbles.

Roach noted that Chinese policymakers need to adopt further tougher measures that are backed by disciplined action on three fronts: interest rates, bank reserve requirements and administrative measures.

He expected more interest rate hikes to be rolled out in the foreseeable future and the growth rate of the Chinese economy to slow down.

"If the government moves to tighten the monetary policy in consistence with its prudent posture, it is reasonable to expect the growth rate in China will slow," he said.

US investment bank Goldman Sachs forecast that China's consumer price index (CPI) will likely increase to 4.9 percent year-on-year in November from 4.4 percent in October.

The October CPI growth was well above the government's full-year target of 3 percent - with the price of 18 types of vegetables rising more than 60 percent.

The government has raised the minimum wage across the country to calm consumers faced with accelerating inflation.

But Roach warned of the risk of a "wage-price spiral", a situation where higher wages could help fuel inflation.

"You have to be careful because if you start raising wage income while having an inflation problem, you can build in a relationship between wages and prices that adds more to the inflation problem."

Roach noted that the biggest challenge for China in 2011 is how to deal with the short-term asset bubble risks while shifting the economic structure toward internal private consumption.

In the meantime, China's shift toward a more prudent monetary policy stance has also prompted analysts to forecast that the government may set a lower loan target for 2011 in order to slow credit growth.

But Roach said loan growth has been higher than expected in China and banks still have excessive reserves although the required reserve ratio is already at a very high level.

Hu Haiyan contributed to this story.