Tags: AS | China | Inflation

China's Inflation Surges, Spurring Overheating and Tightening Fears

Thursday, 11 Mar 2010 07:06 AM

 

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China's inflation spiked higher in February, adding to pressure on Beijing to prevent overheating and keep the recovery in the world's third-largest economy on track.

Consumer prices rose 2.7 percent in February over a year earlier, up from January's 1.5 percent increase, the National Bureau of Statistics reported Thursday. Driven by a 6 percent jump in food costs, it exceeded most analysts' forecasts and came close to the government's target of 3 percent inflation for 2010.

A spike in inflation over the past four months is forcing Beijing to divide its focus between boosting growth and preventing overheating. Communist leaders have imposed curbs on bank lending but avoided raising interest rates, which could slow growth and affect China's trading partners by denting demand for imports.

"There are lots of signs that price pressure is building in the Chinese economy sooner than expected, and that's going to be a concern for the government," said Tom Orlik, an analyst in Beijing for Stone & McCarthy Research Associates.

Orlik and others said the inflation data were unlikely to provoke an immediate hike in interest rates. But many expect Beijing to raise rates as early as the next two months as it eases back on its stimulus. This year's official growth target is 8 percent, down from the 10.7 percent rate in the final quarter of 2009.

Some doubt China's efforts to prevent overheating will have any impact on Beijing's trading partners because its target level for growth should continue to drive demand for imports.

"All these measures about lending controls and rate hikes are to engineer a soft landing," said UBS economist Tao Wang. "If people are expecting 9 to 10 percent GDP growth from China, then a rate hike or two won't change that prospect at all."

China's imports in February surged 44.7 percent from a year earlier as domestic demand picked up, the government reported Wednesday.

The central bank reported Thursday that Chinese bank lending in February fell to 700 billion yuan ($102 billion), down by half from January's level after credit controls were tightened in mid-January.

In an illustration of the galloping economy's effect on prices, the American Chamber of Commerce in Southern China said Thursday its member companies face higher labor costs as they compete with stimulus-financed construction projects for scarce workers.

"Many of our companies are facing severe difficulty with employees not returning" after last month's Lunar New Year holiday, said chamber president Harley Seyedin. "People are also demanding higher wages."

Still, the chamber said its members plan to boost investment in southern China by 40 percent this year to $9.4 billion.

"Our companies believe the recovery is well on its way," Seyedin said.

Chinese leaders worry the flood of stimulus money and bank lending is fueling a dangerous bubble in prices of stocks and real estate.

Inflation is politically sensitive in China because it can erode economic gains on which the Communist Party bases its claim to power.

The statistics bureau blamed the latest price jump on bad winter weather that hurt food production and said pressure should ease once spring harvests come in.

"So far there is no overheating in the economy," said a bureau spokesman, Sheng Laiyun, at a news conference. "Although February CPI rose faster than before, it is still mild to moderate."

Still, the data showed February's wholesale inflation accelerating to 5.4 percent, up from January's 4.3 percent, which could lead to more retail price hikes.

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

"Inflation is expected to trend higher in the next several months before peaking around midyear," said Jing Ulrich, JP Morgan's chairwoman for China equities, in a report.

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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