WRAPUP 1-China inflation holds steady but tightening not over Published
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WRAPUP 1-China inflation holds steady but tightening not over Published: 10 Mar 2011 19:35:18 PST * China Feb inflation 4.9 pct y/y (Jan 4.9 pct) * Jan-Feb industrial output 14.1 pct y/y (f'cast 13.3 pct) * Data supports view that Beijing past tightening midpoint * Chart on Chinese inflation: BEIJING, March 11 - Chinese inflation levelled off in February while industrial output accelerated, tentative signs that the government is succeeding in taming price pressures without unduly harming growth in the world's second-largest economy. Beijing is not about to declare victory in its battle against inflation, with economists warning that it could pick up sharply in the coming months. But data published on Friday lends credence to the view that it is more than midway through a sustained campaign of monetary tightening launched nearly half a year ago. China's consumer price inflation steadied at 4.9 percent in the year to February, the same as in January, the National Bureau of Statistics said. Although above forecasts for 4.7 percent, the reading contrasted with dire warnings a few months ago of runaway prices. Core inflation, stripped of volatile food costs, slowed. People's Bank of China Governor Zhou Xiaochuan struck a guardedly optimistic note. "Currently, inflationary expectations are generally stable. That is to say, if we observe the CPI (consumer price index) figures for December, January and February, although they are high, inflationary expectations are currently relatively stable," he said at a news conference during China's annual session of parliament. Nevertheless, worries that further increases of Chinese interest rates and bank reserve requirements are inevitable in the coming months weighed on global markets, which were already reeling because of weak U.S. economic data and unrest in Saudi Arabia. Asian equities added a touch to losses on the day, and the Shanghai stock market dipped 0.3 percent at 0315 GMT. "Clearly, the consumer price index is stabilising, but the risk is still significantly on the upside," said Wei Yao, economist with Societe Generale in Hong Kong. "It means the central bank will probably stay on the course of tightening," she added. INFLATION A PRIORITY Industrial output in the first two months of 2011 rose 14.1 percent year-on-year from a 13.5 percent pace in December, vaulting past market expectations of a 13.3 percent increase. Reflecting the surge in global commodity costs earlier this year, producer price inflation jumped in February to 7.2 percent from 6.6 percent a month earlier. China's top leaders have declared that their priority this year is to control inflation. So far, complaints about rising prices have amounted to little more than grumbles, but serious inflation has sparked social unrest in China in the past. To meet the official goal of keeping inflation to a 4 percent average this year, the government has raised interest rates three times and banks' reserve requirements five times since October, while also using a series of direct controls to cap price rises. The next dose of tightening may be just around the corner. "The higher-than-expected CPI may push the government to raise interest rates or the reserve requirement ratio in March," said Liu Dongliang, analyst with China Merchants Bank in Shenzhen. LENDING CONTROLS The most important part of Beijing's efforts has been reining in banks, which unleashed a torrent of credit over the past two years, swamping the economy in cash. Reports in official media have said that new loans in February were slightly more than 500 billion yuan ($76 billion), a steep drop from January and considerably less than expected. If confirmed, that would suggest that China has finally gained traction in controlling the excesses of banks. In a statement on Friday, the Chinese central bank said it would ensure that there is an "appropriate" amount of liquidity in the economy this year, guiding credit growth at a reasonable pace. [ID:nBJB004046] For all these signs of progress in taming inflation, it is notoriously difficult to interpret Chinese economic data at the start of the year. Many businesses shut their doors or run at half speed for weeks because of the Lunar New Year, which fell in early February this year. A reminder of the distortions this causes came on Thursday, when data showed that China had recorded its largest trade deficit in seven years in February. That helped fuel a sell-off in global markets, but economists said the country was likely to return to a chunky surplus over the rest of the year. [ID:nTOE72903F] (Additional reporting by Aileen Wang, Koh Gui Qing, Chris Buckley and Zhou Xin; Writing by Simon Rabinovitch; Editing by Ken Wills)
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