Tags: hans | parisis | china | inflation

China May Beat U.S. in Rate Hike Race

By Hans Parisis   |   Thursday, 11 Mar 2010 02:47 PM

There are many fresh signs that price pressure is building in the Chinese economy sooner than expected.

Thursday, the Chinese National Bureau of Statistics said producer price index, a major measure of inflation at the wholesale level, increased by 5.4 percent year-on-year in February, which was 1.1 percentage points higher than in January.

Consumer price index increased by 2.7 percent in February from the previous year, which was 1.2 percentage points higher than in January, which saw a 1.5 percent increase year-on-year.

Housing price inflation also accelerated in February, with costs in 70 Chinese cities rising by 10.7 percent from a year earlier, up from January's 9.5 percent rate the government had reported.

Last week, Premier Wen Jiabao stated the government “hopes” to hold overall consumer price rises to 3 percent this year.

If the actual rising trend of inflation is confirmed, China will have no other choice than to raise interest rates until inflation calms down.

Investors should take note that higher interest rates should moderate, or even slow, growth and dent China’s demand for foreign consumer goods and industrial materials.

Now that inflation has been rising for the past four months, the government will have to make a difficult choice and share its focus between boosting growth and preventing overheating.

“So far there is no overheating in the economy … although February CPI rose faster than before, it is still mild to moderate,” said Sheng Laiyun, a spokesman of the National Bureau of Statistics.

Nevertheless, Tao Wang, China economist for UBS in Beijing, forecasts a rate hike “should happen relatively soon -- if not this month then probably early in the second quarter.”

Other analysts don’t predict higher rates so soon.

Even if those analysts expect China to raise interest rates this year, they say the People's Bank of China, or China’s central bank, probably would like to wait until the Federal Reserve raises U.S. rates.

Such a move by the Fed would signal to Chinese officials that a global recovery is firmly under way. And when Chinese and U.S. interest rates go up simultaneously, this should help to avert excessive influxes of speculative foreign money into China because of higher Chinese interest rates.

Meanwhile, we see the growth of money in circulation in China is slowing a little bit in February.

But the M2 and M1 are still rising at a mind-boggling 25 percent and 35 percent, respectively, on a year-over-year basis. The broad Chinese M2 measure of money supply, which covers cash in circulation and all deposits, went up 25.52 percent in February from a year earlier to 63.6 trillion yuan ($9.314 trillion), 0.56 percentage point lower than the rate in January, the central bank said.

The narrow M1 measure of money supply, which covers cash in circulation plus current corporate deposits, rose 34.99 percent year-on-year to 22.43 trillion yuan, 3.97 percentage points lower than the growth in the previous month.

China has a serious inflation and overheating problem simmering. Chinese officials will have to raise interest rates sooner, rather than later, and certainly sooner than the Fed, even if they like it or not.

This could substantially curb their buying and stockpiling appetite of all “these materials and goods” the “West” isn’t stockpiling.

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