January 14, 2011

China's grain reserves help tame inflation

China's grain reserves are sufficient to help the government control inflation, but uncertain weather remains the biggest risk for the country's grain output in 2011, said Yao Jingyuan, chief economist of the National Bureau of Statistics.

The government can put reserves in the market "whenever necessary," even if grain output falls, he said.

China has about 200 million tonnes of grains in government reserves, Chinese Premier Wen Jiabao said earlier.

However, it is always possible that grain production could fall substantially if disrupted by a major natural disaster, Yao said, referring to crop losses that led to galloping inflation in 1988 and 1994, when the consumer price index rose 18.8% and 24.1%, respectively.

"Hyperinflation may happen when grain output decline, overheating of the economy and excessive money and loan supply come together," he said.

Short of those extreme circumstances, however, the country's reserves are sufficient to control inflation.

The grain harvest rose for a seventh consecutive year in 2010, despite the loss of 16.8 million tonnes of grain due to drought.

Yao suggested that the government set up a special fund to support production of agricultural products not backed by government reserves, such as vegetables. The fund could be used to subsidise planters, traders and low-income earners, he said.