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Controlling Inflation Is Actually Not That Big Of A Deal For China's Leadership

  China Parliament ...

China's government is only somewhat interested in controlling inflation, and is likely to cut its efforts after H1 2011, according to Societe Generale Economist Wei Yao.

That's because the division of the government that makes the final decision on monetary policy, the State Council, is far more interested in preserving a high rate of growth.

From Societe Generale Wei Yao:

Last but not least, we should remember that China’s central bank is not independent and all rate decisions are subject to the approval of the State Council, which seems to be much less tolerant about slowing growth for the sake of social welfare. Piecing all these aspects together, we think monetary policy tightening this year will be front-loaded as the Chinese economy is expected to overheat further and inflation is not likely to peak until H2. 

So the next four months are going to be full of rate hikes a new government anti-inflationary policy, but how effective will these attempts actually be? Here's a handy guide to how China will try to control its inflation problem, the tools it has at its disposal, and how effective each is.

It seems as if two of the big facts driving prices higher in China, rising demand and bad weather impacting food and other commodities, are pretty much stuck no matter what the government does.

Don't miss: 10 weather events sending commodity prices higher >

Image: Societe Generale

Joseph Stiglitz Predicts Another 2 Million Foreclosures In 2011

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Previously, Stiglitz has questioned the Fed's quantitative easing programme suggesting they're not enough to grow employment in the U.S. and are just causing other problems around the world.

Read the rest at Bloomberg >

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China prepares for 'severe, long-lasting drought'

By CARA ANNA
Associated Press

(AP:BEIJING) Chinese officials said Wednesday they were preparing for a severe, long-lasting drought in several parched provinces, causing wheat prices to spike on the prospect of the world's largest consumer putting pressure on a global supply that's already squeezed.

Premier Wen Jiabao led a State Council meeting Wednesday on increasing grain production in the country that's both the world's largest wheat grower and largely self-sufficient in supply.

The U.N.'s food agency has warned that the monthslong drought is driving up the country's wheat prices, and now the focus is on whether China will buy more from the global market, where prices have already risen about 35 percent since mid-November.

The rising prices add to growing concerns in China about inflation, which the government sees as a potential source of social unrest. Average flour prices rose more than 8 percent in January from the previous two months.

Wheat futures were up Wednesday at both the Chicago Board of Trade and the Zhengzhou Commodity Exchange in China, where prices for September delivery hit a new high. They were at 3,051 yuan ($463) a ton Wednesday night.

State television broadcast images Wednesday of withered crops in cracked earth. State media have said the eastern province of Shandong faces its worst drought in 200 years and that the other affected provinces across the country's north and east are facing their worst in 60 years. Shortages of drinking water have affected 2.6 million people.

China's national weather bureau forecasts little if any rain for the Shandong region through Feb. 17.

" What we are doing now is making full preparations to deal with a severe, long-lasting drought," said the director of emergency relief at Shandong's weather bureau. Like many Chinese officials, he would not give his name.

China has said the drought is mainly affecting Shandong, Jiangsu, Henan, Hebei and Shanxi, which grow more than two-thirds of the country's wheat.

China's winter wheat is harvested in June, and Tuesday's alert by the U.N. Food and Agriculture Organization said the situation could become critical if a spring drought follows the winter drought or if temperatures plunge this month.

" At the moment, we're not projecting China to be a significant importer in the current year," said Amy Reynolds, senior economist with the London-based International Grains Council.

She did point out that global wheat stocks are tight, and it's very difficult to tell how much wheat China has stockpiled.

Analyst Ma Wenfeng with Beijing Orient Agribusiness Consultant Ltd. said China's state wheat reserves were 53 million tons at the end of 2010, but private reserves by companies and others could add up to another 30 million tons.

The U.S. Department of Agriculture on Wednesday made no changes to its numbers on China as it released its monthly estimates of global supply and demand, continuing to put China's wheat reserves at 54 million tons and predict 1 million tons of imports.

Both Reynolds and Ma see China importing 2 million to 3 million tons of wheat this year under current conditions, not much above the country's usual import level.

Looking to imports to help fight China's drought-fed inflation may not work, Carl Weinberg, chief economist for New York-based High Frequency Economics, wrote in a report.

Grain crops in other major producer nations such as the United States and Australia have been reduced by bad weather and natural disasters. Meanwhile, wheat prices shot up in the last few months after Russia imposed a wheat export ban and Ukraine, another major grain exporter, imposed quotas on exports because of drought.

" Importing grains at lower prices than domestic prices may not be possible, if imports are available at all," Weinberg said in the report, released Wednesday.

The State Council, or China's Cabinet, on Wednesday said the government will increase minimum purchase prices for grain by up to 21 percent more than last year to encourage production, and it will allocate 1.2 billion yuan ($182 million) for drought-fighting technologies in the stricken region.

In Beijing, consumers already grumpy about the country's rising inflation were returning from the weeklong Lunar New Year holiday to find nothing had improved.

" I normally don't spend so much money for food during the holiday," shopper Zhou Yuanji said. " I really feel the pressure this year. Everything is getting so expensive."

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Associated Press researchers Yu Bing and Zhao Liang contributed to this report.