China's inflation hits 11-year peak
BEIJING (Reuters) - Chinese consumer inflation rate surged in January to an 11-year high of 7.1 percent and looks set to rise further, cementing expectations that Beijing will stick to a tight monetary policy despite softening economic growth.
Many economists said inflation was likely to intensify, even as the impact of recent fierce weather fades, because of rapid money growth and rising raw material costs that have not yet been passed on to the consumer.
Mounting popular concern over inflation poses a stiff policy challenge for China's leaders, who want to use the Olympic Games in August to showcase Beijing's economic stability.
"The acceleration in money and credit growth in January suggests that inflation is likely to have further legs to run," Hong Liang and Yu Song, economists with Goldman Sachs in Hong Kong, said in a note to clients.
They said February's consumer price index (CPI) was likely to rise by much more than 7 percent, compared with a year earlier, and may approach double digits.
"Therefore, we believe it is far too early to expect any policy loosening in China. To the contrary, policy makers in China will likely try to tighten monetary policy further, with more reserve requirement ratio hikes, faster yuan appreciation, and more heavy-handed controls over bank lending," they said.
The rise in January's CPI, up from 6.5 percent in December, was in line with market forecasts and was the highest since September 1996. Other Asian countries are also grappling with rising prices. Inflation in Singapore is at a 25-year high.
Food, which makes up one-third of China's consumer basket, cost 18.2 percent more in January than a year earlier after rising 16.7 percent in the year to December, according to the National Bureau of Statistics.
The price of pork, the staple meat for China's 1.3 billion people, was up 58.8 percent from January 2007.
Swine disease, surging feedgrain costs and low prices in 2006 that deterred farmers from rearing hogs are behind the spike, which has spilled over to other meat and food items.
By no means all economists believe inflation is getting out of control. Mingchun Sun at Lehman Brothers in Hong Kong expects the rate to peak at 7.5 percent in February and to fall to just 1.1 percent in the fourth quarter.
Encouraging this view, non-food inflation rose only modestly to 1.5 percent in January from 1.4 percent in December.
Yao Jingyuan, chief economist at the statistics office, also said inflation would ebb in the second half of the year.
Yao was quoted by the official Xinhua news agency as blaming the rise in inflation on a low base of comparison in 2007, the slightly earlier date this year of the Lunar New Year holidays and the impact of severe winter weather that swept southern China last month.
The snowstorms, the worst in decades, disrupted transport links and damaged crops.
But Jun Ma, chief China economist at Deutsche Bank in Hong Kong, disagreed that the jump in prices would be temporary. He said pressures already in the pipeline were likely to drive the CPI up 7.7 percent in February and 8.1 percent by March, compared with their respective months in 2007.
"It's going to be very tricky in the next few months. Right now, there is pressure for monetary authorities to relax a little bit due to the need for financing reconstruction after the snowstorm and also pressure from the export sector, screaming that they are facing a lot of U.S. downside risk," Ma said.
"But I think probably in the second half of March or April, when inflation continues to make new highs, the government will be convinced that further tightening is inevitable," he added.
Ma expects two interest rate rises in coming months, while Stephen Green at Standard Chartered Bank in Shanghai reiterated his forecast for four increases by the end of the third quarter.
Other economists think the central bank will put greater emphasis on containing inflation by letting the yuan strengthen more and by further increasing banks' reserve requirements.
Qing Wang at Morgan Stanley, for instance, is forecasting no change in interest rates this year.
The yuan's rate of climb has already quickened in tandem with the acceleration in inflation over the past few months.
A dearer currency will make imported goods cheaper and reduce China's trade surplus, the fount of excess liquidity that economists say is fuelling inflation.
The central bank let the yuan rise on Tuesday to 7.1534 per dollar, the highest level since the currency was depegged from the dollar in July 2005 and allowed to float in managed bands.
"We believe that accelerating further the appreciation of the currency will be the way to mop up liquidity stoked by inflows of money from the balance-of-payments surplus. That is still the major source of inflation in China," said Mole Hau, an economist at Core Pacific-Yamaichi in Hong Kong.
(Reporting by Jason Subler, Zhou Xin and Simon Rabinovitch; Writing by Alan Wheatley; Editing by Ken Wills)
- Tweet this
- Share this
- Digg this