world growth

world growth

Thursday, November 11, 2010

China Inflation Jumps To 25-Month High In October

A jump in food costs drove China's inflation to a 25-month high in October despite government efforts to cool living costs, raising the possibility it might impose new controls that could further slow economic growth.

The 4.4 percent inflation rate — due mostly to a 10.1 percent increase for food — was far above the official target of 3 percent and a sharp jump from September's 3.6 percent, official figures showed Thursday. The increases exceeded forecasts by private sector analysts.

While other governments try to shore up shaky growth, Beijing wants to cool inflation and guide China's rapid expansion to a more sustainable level after its stimulus-fueled rebound from the global crisis. It raised interest rates last month and ordered banks on Wednesday to increase reserves in a move to curb lending.

Inflation is so far limited to food but could spread as money from Beijing's stimulus and a flood of bank lending courses through the economy, said William Hess, managing director of China Analytics, a Beijing research firm.

"They're going to have to be very careful about how they manage inflation overall," Hess said. "They don't want it to spread more broadly and contribute to a broader public concern about where prices are heading."

Inflation is especially sensitive in a society where poor families spend up to half their incomes on food. Rising incomes have helped to offset price hikes, but inflation erodes the value of savings and undercuts economic gains that help support the ruling Communist Party's claim to power.

"China needs to do more to keep this year's inflation under the target ceiling," statistics bureau spokesman Sheng Laiyun said at a news conference.

Sheng gave no details but Hess said Beijing might impose price controls if the cost of basic items such as grain continues to rise. Unexpectedly strong inflation also might prompt new interest rate hikes.

China's post-crisis growth peaked at an explosive 11.9 percent in the first quarter of this year. It cooled to 9.6 percent in the three months ended September as Beijing clamped down on a boom in bank lending and real estate investment.

Any moves that further slow growth could affect the United States, Australia and other economies by cutting demand for their exports of iron, machinery and other goods.

The announcement came as leaders of the United States, China and other major economies gathered for the Group of 20 meeting in Seoul, South Korea, aimed at reviving global growth and reducing imbalances in global trade and financial flows.

China's food price inflation has risen steadily this year, increasing from 5.7 percent in June to 8 percent in September.

October wholesale prices rose more strongly than consumer prices, up 5 percent over a year earlier, suggesting producers face pressure to pass on costs to consumers.

Beijing has expressed concern that a weaker dollar and the Federal Reserve's moves to inject money into the U.S. economy to stimulate growth might fuel inflation. That might boost the cost of China's imports of wheat and other commodities.

"As imports of food start to increase, there is a risk that some of that inflation may leak back into the Chinese economy," said Hess.

Also Thursday, the government reported the surge in bank lending eased in October, with total loans of 587.7 billion yuan ($86 billion). That was down from September's 595.5 billion yuan — a figure analysts said was so far above government plans that it might have triggered the Oct. 19 rate hike as a warning to lenders to curb credit.

Growth in factory output and retail sales also eased in October, though both still rose at double-digit rates over a year earlier, the government reported.

Industrial production rose 13.1 percent, down from September's 13.3 percent. Retail sales increased 18.6 percent.

The World Bank said last week China's inflation may stay as high as 3.3 percent through next year.