The inflationary pressure in China should decrease within six to nine months, although the expansion of credit has greatly increased expectations on inflation, Wang Tao, chief China economist of UBS Securities Co. Ltd., said in a group interview on July 21 in Beijing. The fact that some of the loans are used for fiscal functions was also a cause for uncertainty concerning the risks of inflation in the mid term.

While promoting investment to expand domestic demand and ensure economic growth, "cooperation between banks and the government" becomes more justifiable, Wang said. The practice of local governments carrying out infrastructure investment projects through large amounts of bank financing allows bank credit to play a quasi-fiscal function. Expansion at the local level may freeze or at least hinder the monetary policy of the central bank, making it more difficult to control inflation through policy implementation.

The prudent forecast by Wang may not be completely accurate, as inflation is already appearing, Wei said.

One of the main characteristics for this year's bank credit is the incredible rate at which loans have been expanded. The 7.37-trillion-yuan increased loans have already surpassed the target set at the beginning of this year. Past instances of competitive credit granting in the 1980s and 1990s yielded negative results. A large number of loan extensions in 1984 were followed with inflation in 1985, while the first half of 1993 saw inflation reappear after an extensive number of loans were granted in the previous year.

A large amount of money has already been poured into the market, inevitably bringing pressure of price hikes. And while the present social demand may be inadequate, with many industries facing production capacity surpluses together with the high price level in the same period last year, China still doesn't see obvious inflation from the consumer price index (CPI) and producer price index.

Prices have subsequently started to show clear signs of increase in China. Statistics released by the National Development and Reform Commission on July 21 showed that the average ex-feedlot price of pork in large and medium-sized cities reached 10.77 yuan ($1.58) per kg on July 15, up 2.49 percent from the previous week.

Grain prices are experiencing hikes as well, as figures released by the National Bureau of Statistics on July 20 showed that grain prices have been steadily increasing on a month-by-month basis in the first half of this year. From January to June, the monthly growth rates were 0.2 percent, 1 percent, 1.5 percent, 0.4 percent, 0.8 percent and 0.6 percent, respectively. The grain prices have increased for six consecutive months, with the aggregate growth reaching 4.9 percent.

"Since grain prices are closely related to prices of many agricultural and sideline products, the continuously increasing grain prices should bring attention to the situation," the NBS warned.