China Inflation Lowers Easing Odds, Curbs Stock Gains, Deutsche Bank Says

Rising vegetable prices in China are increasing inflationary pressure and reducing the likelihood the government will ease monetary policy in the near term, according to Deutsche Bank AG.

China’s State Council, or cabinet, urged local governments to increase vegetable supplies to stabilize prices, according to a statement on the government’s website yesterday. The nation has seen large price swings in recent years and this year’s floods have disrupted supplies, according to the statement.

“A State Council meeting convened specifically to discuss vegetables is extremely unusual and sends a message on how concerned the government is” about the stability of food prices and inflation, Jun Ma, Deutsche’s chief economist for Greater China, said in e-mailed comments to clients today.

Consumer prices may rise above 4 percent this month, said Ma, ranked first in Institutional Investor’s 2010 All-China poll. The government’s full-year inflation target is 3 percent.

The benchmark Shanghai Composite Index has rallied 13 percent from this year’s low on May 7 on speculation slowing industrial output and retail sales leave policy makers room to loosen lending curbs and boost investment in coming months.

A rebound in property prices in the past fortnight also increased pressure on the government to more strictly implement its tightening policies on the real-estate industry, which will likely cap stock-market performance, Ma said.

The Shanghai Composite Index was little changed at 10:57 a.m., while a measure of property stocks slid 1.2 percent for the steepest decline among the five industry groups. The property gauge has fallen 22 percent this year after the government increased down-payment requirements on home sales and ordered banks to set aside more deposits as reserves.

Prevent Stagflation

China should tighten its monetary policy gradually to prevent possible stagflation, the Securities Daily reported, citing economist Li Yining. The country should be wary of inflation in the second half of the year, Li said at a forum, according to the report.

Consumer prices rose 3.3 percent in July from a year earlier, the highest in 21 months, as floods destroyed crops, increasing food costs, according to the statistics bureau. Vegetable prices have risen 18 percent since July, while prices of eggs have increased 20 percent since June, reflecting the effect of floods, higher costs and hoarding, Deutsche Bank’s Ma said.

The probability that consumer prices topped 4 percent in August has “risen further,” Ma said. The push to increase food production will likely benefit producers of vegetables, animal food and fertilizer, he said.

To contact the Bloomberg News staff on this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.net

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