China’s Inflation Quickens as Industrial Production Climbs

By Bloomberg News
March 11 (Bloomberg) -- China’s inflation reached a 16- month high, industrial output climbed and new loans exceeded forecasts, adding to the case for the government to pare back stimulus measures.
Consumer prices rose 2.7 percent in February from a year earlier, the National Bureau of Statistics said in Beijing today, compared with the 2.5 percent median estimate of 29 economists surveyed by Bloomberg News. Seasonal factors stemming from a weeklong holiday may have boosted prices. Production rose 20.7 percent in the first two months of 2010, the most in more than five years.
Premier Wen Jiabao aims to hold full-year inflation around
3 percent after banks flooded the financial system with money to drive a rebound from the global recession. Gross domestic product grew 10.7 percent last quarter and central bank Governor Zhou Xiaochuan said March 6 that anti-crisis policies, including the yuan’s peg to the dollar, must end "sooner or later."
"Inflation may top the 3 percent policy target by April, which is bound to trigger further monetary tightening," said Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd. in Hong Kong. He sees benchmark interest rates increasing as early as this month.
Stocks across the region dropped, a reflection of the sensitivity of economic expansions from Australia to South Korea to any possible tightening and slowdown in China, the world’s fastest-growing major economy.

Lending Growth

The Shanghai Composite Index swung between gains and losses, Australia’s S&P/ASX 200 Index closed down 0.1 percent and the Kospi index fell 0.2 percent as of 2:47 p.m. in Seoul.
Twelve-month non-deliverable yuan forwards were at 6.6389 per dollar as of 1:53 p.m. in Hong Kong, after touching 6.6305, the strongest since Feb. 1. That reflects bets the currency will rise about 2.7 percent from the spot rate of 6.8261.
Banks extended 700 billion yuan ($103 billion) of new loans in February, central bank data showed today. That compared with
1.39 trillion yuan in the previous month and 1.07 trillion yuan a year earlier. The median estimate was 600 billion yuan.
M2, a measure of money supply, rose 25.5 percent, compared with a 26 percent gain in January. The government targets 17 percent M2 growth for this year. Retail sales rose 17.9 percent in the first two months from a year earlier, and urban fixed- asset investment gained 26.6 percent. Retail sales grew 22.1 percent in February, the bureau said.
Economists often look at January and February numbers together to eliminate distortions caused by a one-week Lunar New Year holiday. China’s 2010 data is also boosted by comparisons with year-ago levels depressed by the financial crisis.

Overheating Signs

Statistics bureau spokesman Sheng Laiyun told reporters that a low base last year boosted the output number and the government doesn’t see signs of economic overheating. Inflation may slow in March on improved weather after snow and storms pushed up food costs at the start of the year, he said. Food prices rose 6.2 percent in February from a year earlier.
His comments contrasted with some economists’ concern after trade data yesterday showed exports rebounding faster than economists forecast and a property-market report said prices climbed in February by the most in almost two years.
"More decisive policy tightening measures than those implemented so far are needed to prevent the economy from overheating," said Song Yu and Helen Qiao, Hong Kong-based economists with Goldman Sachs Group Inc. The government may increase interest rates and bank reserve requirements and control investment approvals and funding, they said.

Price Pressures

Barclays Capital increased today its projection for China’s inflation rate this year to 3.5 percent from a previous estimate of 3 percent.
Commodity costs, reforms of China’s energy and resource pricing, and the effects of last year’s expansion of credit may add inflation pressures this year, China’s top planning agency told lawmakers last week. Baoshan Iron & Steel Co. and spirits manufacturer Kweichow Moutai Co. are among companies to have pushed up prices.
Producer-price inflation climbed to 5.4 percent in February from 4.3 percent in January, the statistics bureau said today.
The central bank hasn’t raised benchmark interest rates since December 2007, before the financial crisis deepened. The one-year lending rate is at 5.31 percent and deposit rate is at
2.25 percent. China has also effectively pegged the yuan at about 6.83 per dollar since July 2008 to help exporters.
The central bank has twice raised lenders’ reserve requirements this year. Deputy Governor Su Ning said this week that those moves were to prevent monetary conditions becoming "excessively loose" as the government continues to implement what it describes as a "moderately loose" stance.
Policy makers are targeting lending of 7.5 trillion yuan,
22 percent less than last year’s actual figure, and pledging to crack down on property speculation. The government has tightened second-home mortgages and banks have reduced discounts on home- loan rates.