December 11, 2010 / 3:31 AM / 9 years ago

Jump in China inflation keeps focus on tightening

BEIJING (Reuters) - Chinese inflation soared past forecasts to a 28-month high in November and showed signs of spreading beyond food prices, putting pressure on the government to ratchet up its monetary tightening.

A worker rides his bicycle past shipping containers at the Longtan port in Nanjing, Jiangsu province December 10, 2010. China's imports and exports were much stronger than expected in November, robust numbers that could clear the way for the central bank to raise interest rates as soon as this weekend. REUTERS/Sean Yong

A day before the data, China’s central bank raised lenders’ reserve requirements for the third time in a month to sop up some of the excess cash in the economy that is driving prices higher. With inflation on the march, analysts said that more resolute action was needed.

“At least one interest rate rise is needed for this year, otherwise authorities will give the public quite a surprising message, because if you see inflation but no rate hike, people will doubt the determination to fight inflation,” said Shen Jianguang, economist with Mizuho Securities in Hong Kong.

The data published on Saturday should give the Chinese government the confidence to intensify its tightening, because all signs pointed to impressive growth momentum in the world’s second largest-economy.

Industrial output rose 13.3 percent year-on-year in November, rebounding from a mild dip in October and outpacing market expectations. Capital spending also topped forecasts, rising 24.9 percent in the first 11 months of 2010 from the same period a year earlier.

In an indication that China is slowly continuing its shift to a more consumption-powered economy, retail sales increased 18.7 percent in November from a year earlier.

The data on Saturday, which had been widely leaked in the Chinese market beforehand, followed hefty increases in exports and bank lending that were reported on Friday.

“The numbers show that the economy is relatively hot. Exports were strong, beating expectations, and investment remained high,” Liu Yuhui, a researcher at the Chinese Academy of Social Sciences. “The strength of economic tightening so far has not been as strong as people thought.”

INFLATION WORRY

For all the signs of strength, worries will center on whether inflation is beginning to slip from Beijing’s grasp.

“Current administrative measures to control inflation can depress prices for a while, but rebounds will take place once the measures are relaxed,” said Lin Songli, an economist with Guosen Securities in Beijing.

Several Chinese cities have implemented direct controls to limit food price increases, while the central government has also vowed strong action to eliminate speculation in the country’s commodity markets and punish anyone found to be manipulating food prices.

Food once again was the primary driver of inflation. The cost of food rose 11.7 percent in the year to November, while non-food prices were up just 1.9 percent. But within the non-food category, consumer goods and housing costs registered clear jumps.

“My worry for inflation is that we are seeing a very clear trend of non-food prices increasing. This is consistent with very strong wage increases this year, global commodity prices increasing and very strong money and credit expansion,” Shen said.

LOOKING AHEAD

The National Development and Reform Commission, a powerful central planning agency, was more confident in its outlook.

In a statement after the data, it said that November’s consumer inflation represented a peak and that the annual pace would fall below 5 percent this month. However, it cautioned that prices would remain elevated in the first quarter next year.

China’s leaders are meeting this weekend in the Central Economic Work Conference to discuss the policy direction for next year.

The Politburo, the Communist Party’s ruling body, set the tone for the meeting last week when it announced a shift to a “prudent” monetary policy from the “appropriately loose” stance of the past two years.

Many in the market believe the change in wording could pave the way for a more aggressive course of interest rate increases and lending restrictions. China has raised banks’ required reserves six times this year, but increased interest rates only once.

Additional reporting by Zhou Xin; Editing by Ken Wills and Alex Richardson

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