GUANGZHOU (Xinhua) - A mixture of policy tools and taking balanced action are the best ways to battle inflation, which is now a "serious issue" in China, said Peter Sands, chief executive of Standard Chartered.
China's Consumer Price Index (CPI), a main gauge of inflation, jumped to 6.4 percent in June, the highest level since June 2008 and well above the government's target of 4 percent for 2011.
"I think that using a balanced mix of tools is more effective than simply depending on one." he said in a recent interview with Xinhua, referring to multiple economic levers such as allowing currency to appreciate, increasing reserve ratios and allowing interest rates to rise.
"This is useful because inflation has multiple causes," he added.
China's central bank has raised its benchmark interest rates three times this year, including a rate hike of 25 basis points announced on July 6. It also hiked its reserve requirement ratio six times this year, ordering banks to keep a record high of 21.5 percent of their deposits in reserve to rein in excess lending.
Sands said balanced action is key to tackling inflation. "Inflation is one of those things where if you start being complacent about it, it simply gets worse," he said. "The authorities are right to be taking action, but it's a very delicate balance. If they take too much action, they will squeeze growth out of the system, but if they don't take enough action, they won't be able to constrain inflation," he said.
Sands believes the yuan will play a bigger role in the global financial system, as China's economy is playing a larger role in the global economy.
"The authorities are managing a very careful step-by-step process, and how fast it unfolds will depend on what happens," Sands said of the internationalization of the yuan.
According to Sands, the challenge of the process will be to allow money to flow in and out of China without obstacle. "China's financial markets will find it difficult to cope with a fully liberalized renminbi," he said.
"It has to go step by step, with the development of China's financial markets," he said.
Sands said China faces a demographical challenge that will prevent the economy from growing as fast as it could. However, he is optimistic about its development.
"The fundamentals of what's driving economic growth in China, including the massive urbanization, is something that will drive growth in China for a significant period," he said.