China's Inflation Near 12-Year High: Gov't

Inflation in China hit a near 12-year high of 8.7 percent in February, the government said Tuesday as it called for a "cool-headed" response to one of the nation's most pressing economic concerns.

The figure, issued by the National Bureau of Statistics, marked the steepest rise in consumer prices since May 1996 and showed China's policy makers falling further behind in their efforts to keep inflation to 4.8 percent this year.

"China's inflation will stay for quite a long time," said Dong Tao, a Hong Kong-based economist with Credit Suisse.

"It's very hard to say how long it could last before there are any positive signs. So far I haven't seen any such signs," he said.

Food prices, the main driver of inflation, were up 23.3 percent in February from a year earlier, according to the bureau. The price of pork, the nation's favourite meat, was up 63.4 percent.

By contrast, non-food prices increased by a mere 1.6 percent in February from a year earlier.

In a rare comment attached to the end of its statement, the statistics bureau called for a calm reaction to the February data, which followed a rise in the consumer price index of 7.1 percent in January.

"We must remain cool-headed, assess the situation correctly and adopt efficient measures in order to conscientiously keep the overall price level from rising too fast," it said.

The bureau said the spike in inflation early this year was partly due to the worst winter weather in half a century, reducing the supply of key commodities such as food by stifling transport networks.

But economists said this factor should not be overemphasised, arguing the continued expansion of liquidity -- brought about mainly by a large trade surplus -- was a more important cause.

The latest inflation data came just days after the central bank governor said there was room for hiking interest rates further, and analysts said they expected a broad monetary policy response.

"We believe that the central bank will have to raise rates more aggressively than they were previously prepared to do," said Jun Ma, Hong Kong-based chief economist for Deutsche Bank.

Investment bank Goldman Sachs said in a research note that policy makers will probably react to the inflation data "with a combination of tightening tools."

These tools may include not just a modest interest rate hike, but also an increase in the money banks must keep in reserve, tightened credit and faster appreciation of the currency, Goldman Sachs said.

China had already raised interest rates six times last year, while lifting the bank reserve ratio 11 times since the beginning of 2007.

The stock market reacted immediately to the release of the inflation data, with the benchmark composite index down 1.40 percent from Monday's close just minutes after the figures were out. The market ended the day down 0.47 percent.

"The impact on the market was obvious, and the inflation figure got investors thinking monetary policies may tighten, and we might even see a rate hike," said Zhang Xinfa, an analyst at Galaxy Securities.

In an address to parliament last week, Premier Wen Jiabao said the government's inflation target for this year was 4.8 percent, as he listed soaring prices as the top worry for China's 1.3 billion people.

"The current price hikes and increasing inflationary pressures are the biggest concern of the people," Wen said.

Inflation in China was 4.8 percent in 2007, the steepest rise in 11 years, as the economy expanded by 11.4 percent over the 12 month period.

Source: AFP

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