China's Wen says priority for inflation, more tightening visa (Reuters)

SHANGHAI/BEIJING (Reuters)-fighting inflation remains the top priority for the Chinese Government and Beijing will maintain its current economic policy, Premier Wen Jiabao said in comments published Monday, bolstering the case for further tightening of policy.

Wen's comments on Saturday were followed by official figures showed that annual inflation in June hit a maximum of three years of 6.4 percent.

"We must treat stabilizing the general price level as the top priority of our macro-economic controls and maintain the direction of macroeconomic adjustments unchanged," Wen said in comments reported by the Central Government's Internet Portal: (www.gov.cn)

He said the Government would try to stabilize prices of pork, a staple meat on the dinner tables of China and the most closely watched in controlling inflation, boosting the supply of pigs.

Meanwhile, China's Central Bank Chief Zhou Xiaochuan promised to maintain a policy of "prudent" fighting stubbornly high inflation, adding that it would try to avoid causing large swings in economic growth.

"The most important problem in macro-economic operations is the relatively large inflationary pressure and the expectations of inflation still strong," Zhou wrote in the latest edition of the China Finance magazine, published by people's Bank of China.

The acceleration of the Chinese consumer inflation in June was led by rising food costs property, revived expectations of further interest rate increases in the coming months and rocked Asian markets, stocks and commodities, although other data pointed to some cooling in its robust economic growth.

"We must be more prominent and important to maintain the basic stability of the general price level and pay attention to price stability in a wider context," said Zhou.

INCREASING DOWNSIDE RISKS?

Zhou also said that the Central Bank would work to "avoid large fluctuations in economic growth, indicating some concerns over downside risks to the economy.

"We should implement prudent monetary policy proactively and safely manage the relationship between the maintenance of relatively fast, stable growth, adjusting economic structures and manage inflation expectations," he said.

China's import growth was the slowest rate in 20 months in June while export growth eased, evidence of wider impact of monetary policies that have weighed on economic growth and increasing sluggishness in the global economy.

Still, China will change its focus from curb inflation policy to support the growth in the second half, said Liu Yihui, a researcher with the Chinese Academy of social sciences, a top Government think tank.

Any relaxation policy now would ignite unrest stagflation in the fourth quarter, Liu added.

Inflation is likely to peak in July and then to about 4 percent towards the end of the year and the Central Bank should fine-tune its policy to rely more on raising interest rates to control inflation and pull real deposit rates out of negative territory, Liu told the official China Securities Journal.

Separately, Xia Bin, a member of the Central Bank, said the China Securities Journal that Beijing needs to use a combination of policy instruments, including interest rates, currency moves and open market operations, as well as changes in banks ' required reserve ratios.

MARKET-ORIENTED INSTRUMENTS

Many analysts expect the Central Bank to rely more on interest rates to fight inflation in coming months, partly because there is limited space to generate further Bank reserve ratios.

"We will use more market-oriented tools and means to maintain the necessary controls on liquidity, while maintaining a reasonable amount of social funding to avoid big fluctuations in economic growth," said PBOC Chief Zhou.

Zhou's remarks indicated the Central Bank is trying to shun heavy credit controls and might lean more conventional policy instruments such as interest rates and currency, analysts say.

The Central Bank has relied heavily on raising Bank reserve requirement ratios to mop up excess cash in the economy, increasing the relationship nine times since October to a record high of 21.5%. It also has raised interest rates five times since then.

"Market-oriented instruments, who oppose administrative measures typically include interest rates and exchange rate. Bank reserve ratios are more market-oriented direct lending controls, "said Gao Shanwen, Chief Economist at China essence securities in Beijing.

Gao is a researcher of the previous Government and once worked at the Central Bank.

($ 1 = 6,465 yuan)

(Additional reporting by Xin Zhou, Lu Jianxin and Carrie I; Editing by Jonathan Hopfner and Ken Wills)

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