Mainland inflation slows, but even more cooling measures expected

PUBLISHED : Thursday, 12 May, 2011, 12:00am
UPDATED : Thursday, 12 May, 2011, 12:00am


Consumer inflation on the mainland eased in April due to moderating food prices. But economists said inflation was still higher than expected, putting pressure on Beijing to raise interest rates and bank reserve requirements to fight price increases.

The consumer price index was up 5.3 per cent year-on-year in April, from a 32-month high of 5.4 per cent in March, according to the National Bureau of Statistics. Food prices rose 11.5 per cent in April from a year earlier, down from March's 11.7 per cent increase, while non-food prices rose 2.7 per cent, the same as March.

Other data released yesterday showed slower activity in the world's second-biggest economy.

Grace Ng, China economist at JPMorgan Chase, said she expected China's policymakers to continue normalising overall monetary conditions, as the consumer price index (CPI) inflation rate is expected to stay elevated in the coming months.

'While the recent easing in the producer price index has been encouraging, headline CPI is still likely to stay elevated in the near term, peaking around June or July at about 5.5 per cent, and to stay above 5 per cent through August,' Ng said.

'On the policy front, we thus see at least one more reserve requirement ratio hike, and potentially two more interest rate hikes (to correct the currently negative real interest rate) for the rest of the year, as well as further yuan appreciation,' Ng said.

Hongbin Qu, HSBC's chief economist for China, agreed that the tightening policy would continue despite some encouraging signs of cooling economic activity.

'Still-strong growth in both domestic and external demand means that Beijing will likely continue to focus on checking inflation in coming months,' Qu said. 'Get ready for more hikes in the reserve ratio and rates in the coming weeks.'

Jing Ulrich, chairman of JPMorgan's China equities and commodities, said that overall the combination of monetary tightening, yuan appreciation and administrative measures should be able to forestall a sharp spike in the CPI.

Since the beginning of the year, the central bank has raised commercial banks' reserve ratio requirement four times and hiked benchmark interest rates twice. The yuan is also accelerating its pace of appreciation, which should help curb inflation.

The producer price index rose 6.8 per cent from a year earlier in April, lower than March's 7.3 per cent rise.

Meanwhile, value-added industrial output rose 13.4 per cent year-on-year in April, down from March's 14.8 per cent growth.

Capital spending accelerated, as fixed asset investment grew 25.4 per cent year-on-year in the first four months, or 0.4 percentage points higher than during the first quarter.

Real estate investment continued its growth, rising 34.3 per cent in the first four months from an increase of 34.1 per cent in the first quarter.

The agency did not provide data for April alone. Property investment grew 33.2 per cent in 2010.

Retail sales of consumer goods rose 17.1 per cent in April year-on-year, 0.3 percentage points lower than in March.