temporary price controls to counter the fastest inflation in two years In China

China may impose temporary price controls to counter the fastest inflation in two years, the cabinet said.

The maximum prices of "major needs every day," and production materials will be used if necessary, the State Council said on its website today, after a meeting chaired by Premier Wen Jiabao.

acceleration of inflation in China has sent stocks and commodities sliding on speculation that efforts to curb prices will cool the world's fastest growing economy. The State Council's announcement came after the Shanghai Composite Index now spread to 10 percent of its decline from a peak of nearly seven months, on 8 November.

"This is the strongest signal that the government could give its determination to curb price increases," said Mark Williams, London-based economist with Capital Economics Ltd. and a former adviser to China for the UK Treasury . "Whether or not the controls end up being widely implemented, the government hopes that the mere fact of the call will help curb inflation expectations."

The cabinet also pledged to stabilize natural gas prices, ending speculation in agricultural commodities and to ensure the supply of vegetables, grains, oil and sugar. State television reported yesterday that the Council of State was working on measures to curb prices.

Last record

The government is struggling with inflation that accelerated to an annual rate of 4.4 percent in October, driven primarily by the cost of food. The cash inflows of trade and investors betting on the growth of China and the yuan gains complicates the management of the economy.

China in January 2008 temporarily froze prices of petroleum products, natural gas and electricity, as well as dairy products and school fees and transport, to combat inflation, which rose at its fastest pace in more than a decade. Shanghai index fell shares in 2008 after peaking in October 2007.

"It feels like the winter of 2007 again," said Gavin Parry, executive director Parry International Trading Ltd., a securities trading desk in Hong Kong. "The last time China has enacted price controls, ending the bull market of Shanghai. The chain reaction could be higher this time given the global focus on China."

Shanghai's benchmark index fell 1.9 percent today, after a decline of 4 percent yesterday.

Punish speculation

The statement today also said the government should try to stop the illegal processing of cotton, followed by a report in China Securities Journal yesterday that the price limits for food possible, and the punishment could be strengthened to the speculation in agricultural commodities.

The government must recognize the "importance and urgency" to deal with prices, the State Council.

October inflation rate was higher than any of the estimates in the economists. The government is also trying to cool property prices after record earnings this year.

"It is good that the government begins to take seriously the problem of inflation, but has not yet touched the root of the problem - excess liquidity," said Dong Tao, an economist at Hong Kong by Credit Suisse Group AG.

Citigroup Inc., the economist Ken Peng sees the central bank to raise interest rates next month and said the government also seeks to limit credit growth after targeting 7.5 trillion yuan (1.1 billion dollars) of new loans this year, 22 percent below the record extended in 2009.