China’s avoidance of a follow-up to its October interest-rate increase even as inflation accelerates risks a more abrupt response next year that restrains the fastest-growing major economy.
Consumer prices jumped 5.1 percent in November, the most in 28 months, a statistics bureau report showed Dec. 11. Producer-price inflation of 6.1 percent was higher than all 28 estimates in a Bloomberg News survey of economists.
The central bank held off over the weekend on the rate move predicted by analysts at firms including UBS AG. and Mizuho Securities Asia Ltd. Officials’ hesitation may be in part a product of China’s policy of holding down the yuan, as higher returns on deposits and loans would boost prospects for inflows of speculative capital that put pressure on the exchange rate.
“The only reason to hold back is the hot money issue,” said Shen Jianguang, a Hong Kong-based economist for Mizuho who formerly worked for the International Monetary Fund and the European Central Bank. “If they are overwhelmed by this concern and refrain from a rate hike, inflation will be a big risk next year, and then eventually they will need to rush in tightening.”
China’s leaders pledged yesterday to give a greater priority to stabilizing prices in 2011 and also better manage liquidity, Xinhua News Agency reported after an annual conference in Beijing to set economic policy guidelines.
The government will also seek to prevent officials “blindly” starting investment projects as the nation’s next five-year plan takes effect, Xinhua said.
The central bank has raised rates once since December 2007, pushing the benchmark one-year deposit rate to 2.5 percent and the lending rate to 5.56 percent. Across Asia, India has moved six times this year, Malaysia thrice, and South Korea twice.
The yuan has fallen about 0.4 percent against the dollar in the past month, closing at 6.6556 in Shanghai last week.
Capital is flowing into China because of monetary easing in developed economies, the strength of the nation’s recovery, and prospects for higher interest rates and a stronger currency. In addition, November’s trade surplus was $22.9 billion and banks lent 564 billion yuan ($85 billion), reports showed last week.
Too Much Cash
“The global low interest-rate environment prevents China’s central bank from raising interest rates,” Wu Xiaoling, a former deputy governor of the central bank, said Dec. 11 in a speech at a hedge-fund conference in Shanghai. She cited the risk of attracting more capital inflows, adding that “excessive money supply is one of the important reasons for China’s inflation,” she said.
The nation’s outstanding local-currency loans were 47.4 trillion yuan in November, 60 percent more than two years earlier, a central bank report showed last week.
China’s economic data for November indicated that the economy is withstanding government campaigns to limit energy consumption in industry and speculation in the real-estate market, while inflation pressures are building.
Industrial-output growth accelerated to a 13.3 percent annual pace. Food prices rose 11.7 percent and residence- related costs such as charges for water, electricity and rent jumped 5.8 percent.
Inflation may be “relatively high” in the first half of 2011 after likely easing to below 5 percent this month, the National Development and Reform Commission, the top state planning agency, said Dec. 11. In the first 11 months of 2010, consumer prices rose 3.2 percent, exceeding the government’s full-year target of 3 percent.
Analysts focused on the possibility of a rate increase over the weekend because of the release of the inflation data, eight days after the Communist Party’s Politburo said the nation would shift to a tighter, “prudent” monetary policy next year.
In addition, government leaders were meeting Dec. 10-12 in Beijing to set economic policy guidelines for next year. London-based Capital Economics Ltd. said the “symbolically” significant rate move could be announced after that conclave.
Instead of raising rates, policy makers have drained money from the financial system over the past two months by setting higher reserve requirements for banks.
On Dec. 10, the central bank said the ratios will climb by half a percentage point, indicating the biggest banks must set aside 18.5 percent of deposits, excluding any extra curbs on individual lenders not publicly announced. Barclays Capital Asia Ltd. estimated the move would lock up 350 billion yuan ($53 billion).
The government is also focusing on administrative measures to combat inflation and its effects, including subsidies for the poor, sales from state food reserves and, where necessary, price controls on “daily necessities.”
Rising wages are fueling inflation pressures. Yum! Brands Inc., the owner of the KFC restaurant chain, said last week that its labor costs in China may climb 10 percent or more in 2011.
China should “move quickly and aggressively to deal with inflation” before tackling longer-term tasks such as boosting the role of private consumption in the economy, Stephen Roach, non-executive chairman at Morgan Stanley Asia Ltd. said Dec. 9 in Hong Kong.
Delaying the use of interest rates and the exchange rate may lead to “a painful correction at a later stage,” said Chang Jian, a Hong Kong-based chief China economist at Barclays Capital. She saw risks including asset bubbles.
The Shanghai Composite Index of stocks has fallen 10 percent from a Nov. 8 high, extending this year’s loss to 13 percent, on concern tighter monetary policy will cut economic growth and profits. Investor reaction to the latest inflation number could be muted when China’s stock exchanges open today because it was leaked ahead of the release, appearing last week in the Economic Information Daily.
Economists anticipate a 1 percentage point rise in the key lending and deposit rates by the end of next year, according to the median forecasts in a Bloomberg survey on Dec. 2. Gross domestic product will rise 9.2 percent in 2011, the median projection shows.
Economists, including at Societe General SA, expect the government to set a lower loan target for next year.
The government’s ceiling of 7.5 trillion yuan for this year will “almost surely be breached,” according to Bank of America-Merrill Lynch. Banks would need to limit new loans in December to less than a 10th of November’s amount to meet the goal, Bloomberg data shows.
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