China's Inflation Rate Heats Up

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(Updates with economist’s comment in third paragraph, breakdown of price gains starting in 10th paragraph) Sept. 9 (Bloomberg) — China’s inflation accelerated for the first time in five months in August, complicating Premier Wen Jiabao’s task of stabilizing an economic slowdown that may extend into a seventh quarter.

Consumer prices rose 2 per cent from a year earlier, the National Bureau of Statistics said today on its website, in line with the median estimate in a Bloomberg News survey of 36 economists and compared with a 1.8 per cent gain in July. Producer prices fell 3.5 per cent from a year earlier, the sixth straight decline.

The rebound may constrain the government’s scope to support economic growth that President Hu Jintao said yesterday faces “notable downward pressure.” Europe’s debt crisis has crimped exports and a property crackdown is damping domestic demand while rising home and food costs threaten to trigger another round of consumer-price gains.

” A renewed inflationary trend could prove to be a further complication to policy makers’ growth-inflation trade-off,” said Glenn Maguire, chief economist at consultant Asia Sentry Advisory Pty Ltd. in Sydney. “China will have enormous difficulties in crafting a policy response to these divergent price and activity trends.”

Hu reiterated yesterday that China will work to balance “steady and robust growth, adjusting economic structure and managing inflation expectations.” He pledged to boost domestic demand and ensure “basic price stability.”

Boosting Investment
Speaking to business people at an Asia-Pacific Economic Cooperation forum in Vladivostok, Hu also urged governments in the region to speed up infrastructure development, describing it as key to promoting recovery and achieving sustained and stable growth.

His comments follow a slew of announcements by the Chinese government approving the construction of new roads, railways and urban infrastructure that Nomura Holdings Inc. estimates have a combined value of about 1 trillion yuan ($158 billion).

The Shanghai Composite Index, China’s benchmark stock gauge, rose the most in eight months on Sept. 7 after the nation’s top economic planning agency published the approvals. The index rose 3.9 per cent in the week ending Sept. 7.

Reignite Inflation
“New spending does call into question what the likely impact will be on several things, one, inflation,” Jing Ulrich, Hong Kong-based chairman of global markets for China at JPMorgan Chase & Co., said in an interview in Vladivostok yesterday. “We’re a bit concerned about food prices, we’re a bit concerned about the rebound in home prices which could reignite inflation, and if too much spending goes into the economy of course down the road we will feel the inflation pressure.”

Economists at Australia & New Zealand Banking Group Ltd., Haitong International Securities Co. and IHS Global Insight said today’s inflation report makes it less likely the central bank will cut interest rates again after lowering borrowing costs in June and July.

The decline in producer prices was deeper than the median estimate for a 3.2 per cent drop in a Bloomberg survey and compared with a 2.9 per cent slide in July. Steeper falls were seen in prices of mining, raw materials and manufacturing goods, while gains in food, clothing and daily-use items moderated.

The statistics bureau will report August industrial output, retail sales and January-to-August investment figures later today.

Worsening Deflation
Inflation has remained below the government’s 2012 target of 4 per cent for seven months. Non-food price gains eased to 1.4 per cent while food inflation accelerated for the first time in five months, rising 3.4 per cent from a year earlier.

Consumer prices increased 0.6 per cent from the previous month, the biggest rise since January, while food prices increased 1.5 per cent from July.

“Given the worsening deflation in producer prices, inflation won’t be a threat in the coming months,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “The rise in CPI inflation is mainly due to a surge in food prices.”

Shen estimates the full-year consumer-price gains will be below 3 per cent. “Inflation shouldn’t be the reason holding back a cut in interest rates or banks’ reserve requirements,” he said.

Risky Experiment
The central bank has held off from monetary policy loosening since July 5 when it cut interest rates for the second time in less than a month. It also lowered lenders’ reserve requirements three times between November and May.

“The authorities seem to be running a risky policy experiment to see how well the economy can hold up without any big dose of stimuli,” Yao Wei, a Hong Kong-based China economist with Societe Generale SA, said in a Sept. 6 note. “Although prudent, this approach is prone to large downside risks in the short term.”

China’s economy expanded 7.6 per cent in the three months through June from a year earlier, the least in three years and the sixth quarterly deceleration. China’s expansion may slow to 7.4 per cent this quarter, according to Lu Ting, at Bank of America in Hong Kong, the No. 1 forecaster on China in Bloomberg Markets’ annual ranking of global economists for the two years through September 2011.

Signs are mounting that the slowdown is deepening. An index of manufacturing purchasing managers contracted for the first time in nine months in August as orders shrank, a government- backed report showed on Sept. 1.

Growing Pressure
New orders obtained by China’s shipyards fell 51 per cent in the first seven months of the year, an Aug. 31 government report showed. China Rongsheng Heavy Industries Group Holdings Ltd., the country’s largest shipbuilder outside state control, last month reported an 82 per cent drop in first-half profit and said new orders in the period slumped to two from 24 a year earlier.

Shen Danyang, a Commerce Ministry spokesman, said last month that the country faces increasing pressure to meet its goal of 10 per cent growth in trade this year.

The customs bureau will issue trade data for August tomorrow. Exports probably rose 2.9 per cent from a year earlier, according to the median estimate in a Bloomberg News survey, after a 1 per cent increase in July. Overseas shipments climbed 24.5 per cent in August last year.

The government is expected to announce a package of measures to support exports this month, the China Daily reported yesterday, citing two unnamed sources from the Ministry of Commerce. Trade figures for August “are not positive and not encouraging,” the paper cited the sources as saying.


–Zheng Lifei. With assistance from Ailing Tan in Singapore, Regina Tan and John Liu in Beijing and Michael Forsythe in Vladivostok. Editors: Nerys Avery,

To contact the reporter on this story: Zheng Lifei in Beijing at [email protected]

To contact the editor responsible for this story: Paul Panckhurst at [email protected]

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