Inflation in China Stays Above Comfort Zone

Subject: Inflation in China Stays Above Comfort Zone Fri Mar 11, 2011 2:31 pm

Inflation in China Stays Above Comfort Zone
By DAVID BARBOZA
Published: March 11, 2011
SHANGHAI — China said Friday that consumer prices rose sharply in February, suggesting that the government may have a difficult time curbing inflation this year.

The consumer price index, the nation’s main gauge of inflation, rose 4.9 percent in February from the same month a year ago, according to the National Bureau of Statistics. That jump was slightly above economists’ estimates and identical to the rise in January.

Food prices alone rose 11 percent in February, though analysts believe that jump may have been affected by the Chinese New Year holiday.

The government also said that the producer price index, a measure of inflation at the wholesale level, rose 7.2 percent in February, the biggest increase since October 2008.

The figures are the latest evidence that China’s booming economy is beginning to overheat, following two years of heavy lending by state-run banks and massive government investment in infrastructure.

And since China is now a major engine of global growth — and the world’s second largest economy — any slowdown here is likely to be felt in the rest of the world.

Aware that soaring food and housing prices are creating public anxiety at home, Beijing has made fighting inflation a top priority this year and set a target to keep the inflation rate at 4 percent.

Last year, when the economy grew at an annual rate of 10.3 percent, China’s consumer price index rose by 3.3 percent. But the last three months of last year saw the index rise sharply, up to 5.1 percent in November, a 28-month high.

This year, Beijing has lowered its economic growth target to 7 percent. And to tame inflation, the government has ordered state banks to restrain lending and to raise interest rates. Beijing has also offered aid and subsidies to farmers.

But slowing inflation has proved difficult, partly because inflation is tied to rising oil and commodity prices. Economists say they expect food and commodity prices to continue to climb early this year.

“Inflation remains at an elevated level and it has not peaked yet,” Wang Qing, a Hong Kong-based economist at Morgan Stanley, said Friday. “We think inflation will rebound in April or May and peak midyear.”

Mr. Wang says, however, that the government’s efforts to fight inflation may begin to pay off in the latter part of the year, and eventually bring the annual inflation rate down to 4.5 percent.

But for now, the public is anxious about food and housing prices that are often rising faster than incomes. And with saving deposit rates in China kept unusually low by state-run banks, many people are seeing the value of their savings erode by what are essentially negative returns.

For instance, inflation rose 3.3 percent last year, according to the consumer price index. But during much of the year state banks were paying deposit rates of 2 percent or less for money held in one-year deposits.

Coping with inflation is just one of the many challenges facing economic planners in Beijing. As part of an effort to encourage more sustainable growth, the government is trying to rebalance the economy by moving away from heavy reliance on investment and exports and toward more domestic consumption.

Indeed, encouraging consumption is part of a broader effort aimed at improving the livelihoods of common people and shrinking the widening gap between the rich and the poor.

For instance, the government has recently promised to spend hundreds of billions of dollars on building affordable housing, while also contributing large sums of money to health and welfare programs and raising minimum wage standards.

But for Beijing, restructuring the economy also means coping with growing complaints from its major trading partners, who say the Chinese currency is undervalued, which gives China an unfair trading advantage.

Chinese authorities insist the Chinese currency, the renminbi, is not significantly undervalued and that any adjustments must be gradual because a sharp rise in the value of the renminbi could bankrupt coastal factories that employ tens of millions of workers.

Lately, though, Chinese officials have begun to hint that the nation’s huge trade surplus — which was about $183 billion last year — will diminish this year. On Thursday, the government reported a rare monthly trade deficit of $7.2 billion for February. Many analysts, though, say the deficit was an aberration linked to volatile early year shipments that were disrupted by the Chinese New Year holiday.

The government’s chief worry, though, seems to be containing inflation and managing growth. Analysts say if inflationary pressure rises too sharply, or growth slows too sharply, public sentiment could turn against the leadership.

“Inflation will continue to be a problem, but it won’t do the economy in,” said Pieter Bottelier, an adjunct professor of China Studies at Johns Hopkins University. “But it worsens already huge social inequalities and housing affordability problems. This could breed so much resentment. I’m worried about the social implications.”
http://www.nytimes.com/2011/03/12/business/global/12yuan.html?_r=1&ref=business

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