China's inflation nears 12-year high

Published Tuesday, March 11, 2008

By Agencies

China's consumer price inflation jumped in February to a near-12-year high of 8.7 per cent, handing the central bank a dilemma over whether to raise interest rates even as the economy is coming off the boil.

Inflation in January was 7.1 per cent and economists had expected a February figure of 8.0 per cent.

"There's growing concern that China's inflation is getting out of control," said Li Huiyong, an analyst at Shenyin & Wanguo Securities in Shanghai.

Share prices initially fell in anticipation of higher interest rates. But the main Shanghai index recovered to end 0.47 per cent higher as investors took comfort in the view that bad weather and other temporary factors were behind the spike in inflation to the highest level since May 1996.

"I think it raises the odds of a hike, but the PBOC is likely to wait for at least another few weeks," Ben Simpfendorfer, a strategist at Royal Bank of Scotland in Hong Kong, said.

The People's Bank of China (PBOC), the central bank, raised interest rates six times in 2007, but it has marked time this year even though bank deposit rates yield less than half the inflation rate.

The National Bureau of Statistics blamed the surprising increase largely on the fierce winter weather and seasonal price rises due to the Lunar New Year holiday.

These factors helped boost the cost of food by 23.2 per cent from February 2007. Pork, the staple meat for most of China's 1.3 billion people, cost 63.4 per cent more than a year earlier. Vegetables were up 46 per cent and food oil rose 41 per cent.

One silver lining was that the annual rate of non-food inflation remained tame at 1.6 per cent, up just a touch from 1.5 per cent in January.

Still, the statistics office said it would now be harder for the government to meet its goal of holding inflation below last year's average rate of 4.8 per cent.

Xie Fuzhan, commissioner of the National Bureau of Statistics, told reporters inflationary pressures were still fairly high.

"Many countries are also experiencing rising inflation. So I think the pressure for global prices to pass through into the Chinese economy is greater than before," he said.

Asked how policy makers should respond, he said: "All the macro-control policies should be fine-tuned in a timely and appropriate manner in light of new developments."

INFLATIONARY MINDSET

Central bankers typically look past volatile energy and food costs when judging underlying inflationary pressures.

But that is tough in China, where food accounts for a third of the consumer price basket and much more for poorer people.

The danger, economists say, is that people will see the ever-climbing headline rate and conclude that prices will keep rising, touching off demands for higher wages and making it harder for the central bank to reverse inflationary expectations.

Grumbling about high prices is already a constant in markets across a country where inflation has sown the seeds of social unrest down the ages, and the authorities will want to pull out the stops to avoid problems ahead of the Olympic Games in August.

"It's true that both the severe winter and Lunar New Year had an impact on the increase, but after so many months of big rises I'm afraid now the risks are high that China will see more broad-based inflation," said Chen Jijun, an analyst at CITIC Securities in Beijing.

"Though non-food inflation is only 1.6 per cent, it has been accelerating. I think the possibility for price rises to spread from food to other sectors is growing," he added.

Some economists said central bank governor Zhou Xiaochuan was likely to wait for less-distorted March data, especially as weakening exports point to a slowdown in economic growth.

But Hong Liang and Yu Song with Goldman Sachs in Hong Kong said they expected the authorities to resort to a mix of tightening policies, including higher borrowing costs and a faster rate of appreciation in the yuan's exchange rate.

"While we believe the snowstorm contributed to the high February reading, we believe that rapid money supply growth has been the main driver of high and rising inflation.

"As a result, we expect CPI inflation to remain at elevated levels in the near term even after the temporary weather-related impact dissipates," they said in a note to clients. (Reuters)

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