More tightening action expected after consumer prices surge
Consumer inflation on the mainland rebounded unexpectedly to 8.5 per cent last month, prompting the central bank to take immediate tightening measures and raising the prospect of faster currency appreciation to control prices.
The People's Bank of China raised the amount of money commercial lenders must hold in reserve by 0.5 percentage point, the fourth such move this year, as the consumer price index rose to within a whisker of February's almost 12-year high of 8.7 per cent.
The decision, designed to mop up excess liquidity that is blamed for stoking inflation, seems to confirm expectations of a surge in money supply and credit growth last month. The reserve requirement ratio will rise to 16.5 per cent from May 20.
The National Bureau of Statistics yesterday said the surprise bounce in consumer inflation - which was 0.3 percentage point above market consensus - largely reflected the impact of high global commodity prices, especially grain.
'We need to watch future price momentum closely and give greater priority to curbing inflation and controlling commodity price rises,' the statistics bureau said.
A reacceleration of food prices, which account for about 30 per cent of the CPI basket, was largely to blame for the inflationary pressure. Food prices rose 22.1 per cent year on year last month, up from 21.4 per cent in March, as meat and poultry prices soared.
Producer price inflation rose 8.1 per cent year on year, although non-food inflation remained low at 1.8 per cent, the same figure as in March.
With the PPI figure expected to have a knock-on impact on consumer prices and non-food inflation also forecast to rise, it now seems certain that Beijing will miss its 4.8 per cent inflation target for the year.
'We believe the April inflation suggests that it is still far too early to claim success in the battle against inflation,' said Goldman Sachs economists Yu Song and Hong Liang.
Although weekly government reports on fresh food prices indicate that prices have begun to fall this month and analysts expect consumer inflation to drop in the second half of the year, most analysts expect headline inflation to break the 6 per cent mark for the year.
Vice-Premier Wang Qishan and PBOC governor Zhou Xiaochuan said last week that curbing price rises remained the government's top policy concern.
However, Gao Huiqing, the head of economic forecasting at the State Information Centre, a government think-tank, said Beijing was unlikely to resort to higher interest rates to combat inflation.
'This will not change the central bank's strategy because the inflation rate was boosted mainly by the surge in global food and oil prices. Raising domestic interest rates will only have a slight impact on inflation, so the central bank will use quantitative instruments,' Mr Gao said.
Instead, with the mainland economy growing at a robust 10.6 per cent in the first quarter and exports powering ahead despite the global slowdown, attention may once again turn to using the exchange rate to cool inflation.
'A higher value for the yuan helps keep a lid on imported inflation by lowering the cost of imported goods. It also reduces the amount of yuan the central bank needs to print to counteract the impact of China's trade surplus on the exchange rate - reducing money supply,' said Jing Ulrich, the chairman of China equities at JP Morgan Securities.
The central bank yesterday set the daily reference rate for the yuan at 6.89 per US dollar, the highest rate since the yuan peg to the dollar was removed in July 2005.
There is a consensus among policymakers that currency appreciation is the best means of fighting global inflationary pressures at home. With global crude oil prices and commodity prices soaring, they are seriously debating making a one-off revaluation of 10 to 15 per cent - although that remains unlikely.
'We stand by our call for a muddling-through approach in policy implementation [this year] featuring 'Three No's': no campaign-style administrative tightening, no large one-off revaluation of the yuan exchange rate, and no aggressive rate rises,' said Morgan Stanley economist Qing Wang in a research note.
Additional reporting by Chen Xumin