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China wary of U.S. subprime fallout and rising inflation
By Jason Subler and Eadie Chen
BEIJING (Reuters) - China is deeply concerned about the potential global economic fallout from the U.S. subprime crisis, which could make its job of balancing growth and fighting inflation more challenging, Premier Wen Jiabao said on Tuesday.
But China's central bank is not ruling out the possibility of higher interest rates even as the United States eases policy.
Although Wen said it would be difficult to keep inflation this year to within Beijing's 4.8 percent target, he said he was confident the government would succeed at its main task for 2008: checking price rises while engineering stable growth.
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But he highlighted the increasing uncertainties brought about by the U.S. mortgage crisis, which has spawned a fall in the dollar, slammed stock markets worldwide and boosted oil prices.
"I am closely watching and feel deeply worried about the global economic situation, especially the U.S. economy," Wen told reporters after the closing session of the National People's Congress, or parliament.
"What concerns me now is the continuous depreciation of the U.S. dollar and when the dollar will hit bottom."
The dollar is trading near 13-year lows against the yen and record lows against the euro, after the U.S. Federal Reserve has repeatedly cut interest rates and after it took the rare step of cutting its discount rate on Sunday.
Wen said Beijing would take the changing economic landscape into account when deciding on further policy steps, despite its having switched to a "tight" monetary policy at the end of last year to curb excessive growth in investment and credit.
Central bank governor Zhou Xiaochuan said earlier that China still had room to raise interest rates to fight inflation.
While many other countries are facing a credit crunch in the wake of the collapse of the subprime mortgage market, China is struggling to contain a surge in liquidity stemming from its massive trade surplus.
"Global economic developments cannot but have an impact on China. Therefore, at the same time as pursuing these policies, we must pay close attention to international economic developments and, based on changing trends, be flexible and timely in adopting corresponding countermeasures," he said.
STILL ROOM FOR RATE RISE
Wen's comments fed into negative sentiment in the country's stock markets, as investors fretted over growing uncertainties in the global economy. The benchmark Shanghai Composite Index <.SSEC> tumbled 3.96 percent to finish at 3,668.897, its lowest close in more than eight months.
Wen stressed the need to walk a fine line between fighting inflation, which hit a nearly 12-year high in February of 8.7 percent from a year earlier, and slamming on the brakes too hard. An abrupt slowdown in output would frustrate efforts to create at least 10 million new jobs a year, he said.
Since the People's Bank of China (PBOC) started its latest tightening cycle in April 2006, it has raised benchmark interest rates eight times and banks' reserve requirements 14 times, to a record 15 percent.
The central bank governor said Beijing would not take any hasty policy decisions on how to respond to the U.S. slowdown but it still has room to raise interest rates even as the United States was lowering its own.
"There is room to adjust various monetary policies," Zhou said. "But it is an art to decide on the detailed moves, on the timing and degree."
China needed to use a range of measures to fight inflation, including increasing the supply of certain goods, Zhou said.
Wen did not specify what role the yuan could play in curbing inflation, but noted that it had strengthened by about 15 percent against the dollar over the last two years, with the pace of appreciation accelerating recently.
The yuan was trading at 7.0830 per dollar on Tuesday, meaning it has strengthened a further 14.5 percent against the dollar since the landmark revaluation in July 2005. Some economists say it needs to strengthen significantly more to help fend off inflows of cash and hence fight inflation.
"Maintaining stable and fairly fast economic growth while curbing inflation is not a target just for this year, but for the next five years," Wen said. "The outcome of these policies must be viewed in the medium to long term. It is very difficult to see them in a short one or two months."
(Additional reporting by Langi Chiang, Zhou Xin and Chris Buckley; Editing by Ken Wills and Jacqueline Wong)