More economic tightening likely as inflation 'tiger' strains on leash
China's rare trade deficit in the first quarter underlined thriving growth but also the rising problem of inflation, which could portend more economic tightening in the coming months.
The US$1.02 billion quarterly deficit - the first in seven years - resulted from a much stronger-than-expected set of trade numbers in March, when exports grew 35.8 per cent compared with economists' forecast of a 23 per cent growth and imports increased 27.3 per cent, higher than the expected 20.6 per cent growth.
Most of the growth in the imports bill came from sharp inflation in commodity prices, a source of concern that Premier Wen Jiabao has likened to a tiger 'difficult to cage' that could potentially threaten social stability.
'Inflation rather than growth is the key macro risk for China,' HSBC co-head of Asian Economics Research Qu Hongbin said yesterday on the latest trade data.
'The strength of domestic demand plus the stronger-than-expected export growth provide leeway for Beijing to continue to focus on checking inflation.'
The National Bureau of Statistics yesterday offered more evidence of widening inflation. Factory-gate prices of crude oil rose the most among major commodities at 10.3 per cent in the month to April 5 while steel prices rose 2 per cent and petrochemicals jumped 6.4 per cent.
Consumer price inflation hovered at a high level of 4.9 per cent for the first two months of this year.
Economists widely expect more increases in the required reserve ratio and interest rates this year.
Qu expects the reserve ratio to be increased by 100 basis points to 21 per cent and interest rates by 25 basis points. This means banks will be required to set aside 21 yuan as reserve for every 100 yuan they lend.
Interest rates have risen six times in the past six months, most recently on April 6, when the benchmark one-year deposit rate was raised 25 basis points to 3.25 per cent and the one-year lending rate rose 25 basis points to 6.31 per cent.
A Hang Seng Bank research report says the reserve ratio will climb another 50 basis points, and interest rates 25 basis points, in the coming months.
