EXCESSIVE liquidity in the domestic market is the main reason for China's high inflation, and the country must control the amount of money in the system if it wants to tame inflation, Yao Jingyuan, former chief economist at the National Bureau of Statistics, said yesterday.

"High inflation is a byproduct of a very loose monetary policy two years ago," Yao told a forum in Xiamen City, southeast China's Fujian Province. "But at that time, we had to carry out such policies amid a worldwide financial crisis."

Yao said the oversupply of money was the biggest catalyst of domestic inflation, while external factors, especially the quantitative easing in the United States, also contributed to the current unabated consumer price rises.

"Rising consumer prices are actually currency deflation, which is a result of too much money floating in the market," Yao said.

China extended 17.6 trillion yuan (US$2.7 trillion) of yuan-backed loans in 2009 and 2010 to counter the global financial crisis. The flood of liquidity has triggered inflation and caused fears of an asset bubble.

The Consumer Price Index, the main gauge of inflation, surged 6.5 percent, a 37-month high, in July.

Some economists forecast the inflation to moderate in August banking on hopes that various government measures may have had their desired effect.

As part of the fight against inflation, China has ordered banks to put aside more money as reserves six times this year to soak up liquidity, and raised interest rates thrice. In June, Yao said China should be able to control inflation to around 4 percent this year.

Source:shanghaidaily