Excessive liquidity weighs on fight to control price increases Consumer inflation on the mainland slowed last month because of more stable food prices, but the money supply accelerated, providing a mixed message on the economy as the country battles to control inflation while keeping growth on track. The consumer price index (CPI) increased 7.7 per cent year on year last month, sharply down from the 8.5 per cent in April and well below the 12-year high of 8.7 per cent in February, according to data released by the National Bureau of Statistics yesterday. Meanwhile, money-supply growth accelerated last month at the fastest pace in four months, adding pressure on the central bank to absorb excessive liquidity to keep it from fuelling inflation. The mainland's broad M2 measure of money supply grew 18.1 per cent last month, much faster than expected, and up from 16.9 per cent in April, according to the central bank. Concerns about the economy and possible inflation-curbing moves by Beijing helped push the Shanghai Composite Index down 2.2 per cent to 2,957.53, the first time it has closed below 3,000 since March 14 last year. The Hang Seng Index dropped 303.74 or 1.3 per cent to 23,023.86, its lowest close since March 31. Jing Ulrich, chairman of China equities at JP Morgan Securities, attributed the moderating inflation to the higher base effect of the previous year and stabilising food prices. But she warned that the recent rise in the producer price index (PPI) threatened to feed through into sustained higher levels of CPI. Food prices, a key component of CPI, rose 19.9 per cent last month from a year earlier, slowing from the 22.1 per cent increase in April. Non-food prices rose 1.7 per cent, slower than the 1.8 per cent gain in April, the bureau said in a statement posted on its website yesterday. Last month's CPI rose 7.3 per cent in urban areas, and 8.5 per cent in rural areas, the statistics bureau said. Meat prices increased 37.8 per cent, with pork surging 48 per cent alone. Cooking oil went up 41.4 per cent, vegetables 10.3 per cent, aquatic products 18.3 per cent and grains 8.6 per cent. 'Looking forward, with food prices stabilising, attention will focus on the possibility of a structural shift from food to non-food inflation,' Ms Ulrich said. The rise in the PPI from 8.1 per cent in April to 8.2 per cent last month was driven by surges in oil, coal and steel, and signalled the build-up of inflationary pressure, she added. Analysts attributed the monetary expansion last month partly to the need for disaster relief as the central bank increased the money supply to help the earthquake-hit areas. In its monthly report, the People's Bank of China said new yuan loans last month totalled 318.5 billion yuan (HK$360.01 billion), up 71.2 billion yuan from a year earlier. Goldman Sachs said it believed the key to assessing the mainland's inflation outlook was how successfully the central bank could control broad money supply growth. 'If the central bank can keep money supply growth from rebounding, CPI inflation would likely also have peaked and would begin to trend down towards 5 to 6 per cent later this year,' wrote Yu Song and Hong Liang, China economists with the US investment firm, in a research note to clients yesterday. 'On the other hand, any rebound in money supply growth will lead us to re-assess our tentative conclusion that inflation may have peaked in China.' But there are growing calls for the government to relax its grip amid slowing growth and a slump in the stock market, which lost almost 10 per cent in two days after the central bank ordered lenders on June 7 to set aside record reserves.