China growth sizzles, inflation bubbles

Reuters

By Koh Gui Qing and Langi Chiang

BEIJING (Reuters) - China's turbo-charged growth eased just a touch in the first quarter, while its inflation jumped to a 32-month high, putting pressure on the government to do more to rein in prices and keep the economy on an even keel.

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Consumer price inflation sped to 5.4 percent in the year to March, the fastest since July 2008 and topping market forecasts for a 5.2 percent increase.

Taken together, the data published by the National Bureau of Statistics on Friday showed that the world's second-largest economy was still sizzling, little hindered by the central bank's half-year tightening campaign that many investors had feared would undermine growth.

"The figures show that inflation pressure will not taper off in the short term and we expect the consumer inflation to remain high in the second quarter," said Sun Miaoling, economist with CICC, the largest Chinese investment bank.

"The government will keep battling inflation as its priority in coming months, which could prompt the central bank to further tighten its monetary policies," she added.

The People's Bank of China has increased benchmark interest rates four times since last October and has required the country's big banks to lock up a record high of 20.0 percent of their deposits as reserves.

TIGHTENING NOT DONE

Inflation had long been expected to run higher in March because of a lower base of comparison. The base effect also suggests that inflation is likely to level off in the coming months before jumping again in June and July, though officials are confident that it will wane in the second half of the year.

Accepting this relatively sanguine view, many economists had thought that the central bank was near the end of its tightening cycle. The median forecast of Reuters poll last week was for just one more interest rate increase over the rest of this year.

But with growth still cruising near double digits, the scope for the government to continue tightening may be bigger than previously anticipated.

Signaling a potentially hawkish stance in the coming months, Premier Wen Jiabao said this week that the government would use all tools at its disposal to wrestle inflation under control.

"We will try every means to stabilize prices, the top priority of our economic controls this year and also our most pressing task," Wen said at a cabinet meeting.

Agricultural prices have been the main driver of Chinese inflation and that remained the case, with food costs up 11.7 percent in the year to March. But there were also signs of a broadening of pressures, with non-food inflation up 2.7 percent year on year, the fastest in more than a decade.

While keeping a tight grip on the yuan, China has steered its exchange rate to a succession of record highs against the dollar in recent days, using a stronger currency to blunt the impact of high import costs.

REBALANCING?

The first-quarter data also offered a glimpse of the Chinese rebalancing that is needed to put the global economy on more stable footing.

From the World Bank to Chinese leaders, the consensus has long been that China needs to promote more domestic consumption and cut its reliance on both exports and energy-intensive investment.

That finally appears to be happening. Consumption contributed 5.9 percentage points to China's first-quarter growth rate, while investment added 4.3 percentage points, the statistics agency said. Net exports actually subtracted 0.5 percentage points, weighed down by a $1 billion trade deficit, China's first quarterly deficit in seven years.

It remains to be seen how much of the apparent rebalancing was a product of soaring global oil costs, which both boosted China's import bill and inflated consumption in price terms.

Speaking at a business forum in southern China on Friday, President Hu Jintao said that the country's economic model was still out of kilter.

"Over the next five years China will make a great effort to boost domestic demand, especially consumer demand," he said.

Global markets registered little impact from the Chinese data, in large part because the numbers appeared to have been comprehensively leaked in the days prior to the official release.

The main Chinese stock index in Shanghai was down 0.5 percent after morning trading and share prices throughout Asia were also slightly softer, with investors bracing for the next round of tightening by Beijing.

(Additional reporting by Aileen Wang, Huang Yan and Kevin Yao, and Ben Blanchard and Zhou Xin in Boao; Writing by Simon Rabinovitch; Editing by Ken Wills)

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