China Inflation Heading for 6% Shows Danger for Wen Extending Rate Pause
China’s inflation pressures have yet to be contained by four interest-rate increases since September, underscoring the danger of any extended policy pause as bad weather threatens to further drive up food costs.
The central bank yesterday increased banks’ reserve requirements to drain cash from the economy after consumer prices rose 5.5 percent in May, the biggest gain since 2008. Inflation may reach 6 percent this month, according to banks from Societe Generale SA to UBS AG.
Premier Wen Jiabao’s government has surprised analysts at banks including Barclays Capital by pausing on interest rates for 10 weeks, the longest gap this year. Officials may be reviewing signs of weakening global growth after the U.S. unemployment rate surpassed 9 percent and manufacturing cooled across Asia.
“There’s still a long way to go” to contain prices, Shen Jianguang, chief economist for greater China at Mizuho Securities Asia Ltd. said in a Bloomberg Television interview. “We need to see a slowdown in the economy,” said Shen, who previously worked for International Monetary Fund. He predicts two more rate increases this year.
The Shanghai Composite Index fell 0.9 percent today, the biggest decline in a week, after gaining 1.1 percent yesterday on stronger-than-forecast industrial production data for May. The market was closed when the central bank announced the reserve-ratio increase yesterday.
Rate Forecasts
Nomura Holdings Inc. said yesterday that interest rates may rise this month and again in the third quarter. Barclays sees one more increase this year, either in June or July. The half percentage point boost to banks’ reserve ratios will take effect on June 20.
A favorable so-called base effect may help to limit inflation in the second half of the year.
Still, stocks are unlikely to stage “a sustained rebound until the market sees clear signals that inflation has peaked,” said Hong Kong-based Jing Ulrich, chairman of global markets for China at JPMorgan Chase & Co. “Extreme weather” could delay a moderation in inflation by fueling food-price gains, she said.
A drought along the Yangtze river has been followed by fatal floods. Food costs rose 11.7 percent in May from a year earlier as pork prices climbed.
Global Challenge
Low-income nations from India to Algeria are struggling with food prices that climbed to a record in February according to a United Nations gauge. The Food and Agricultural Organization index was up 37 percent in May from a year earlier.
China has so far boosted interest rates every other month from mid-October, with the most recent increase taking effect on April 6. Officials have also increased banks’ reserve requirements to a record and allowed the yuan to gain about 1.6 percent against the dollar this year.
“I’m reasonably hopeful the Chinese authorities will move to increase rates,” Stephen Roach, non-executive chairman of Morgan Stanley Asia Ltd., said in an interview in Shanghai today with Bloomberg Television. “Historically, inflation has been very destabilizing for China. The authorities know this.”
Signs of Unrest
While the economy’s expansion is showing signs of moderating, inflation has risen further above the government’s 4 percent target. India, Thailand, Singapore and Malaysia also face price pressures even as their industrial output growth slows or falls.
Wen aims to tame prices and sustain growth to maintain social stability, with the premier noting in March that inflation, corruption, and the gap between rich and poor could “affect the government’s hold on power.”
Signs of social unrest have include clashes involving street vendors in Zengcheng, Guangdong, this month and riots last month in Inner Mongolia. The government has also detained activists after calls for so-called “jasmine” rallies, inspired by revolts in the Middle East and North Africa.
The jobs created by economic growth forecast by the World Bank at 9.3 percent this year may help the government to maintain stability.
“The market has been increasingly worried about a hard landing in China, but the latest data show the economy is still going strong,” said Wang Tao, a Beijing-based economist for UBS. “Hard evidence of a soft landing” was the heading on a Nomura report.
Fixed-asset investment excluding rural households expanded 25.8 percent in the first five months of the year, up from 25.4 percent in January-through-April. Retail sales, which are boosted by inflation, rose 16.9 percent after a 17.1 percent gain in April.
--Zheng Lifei, with assistance from John Dawson and Sophie Leung. Editors: Paul Panckhurst, Cherian Thomas.
To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at +86-10-6649-7560 or lzheng32@bloomberg.net
To contact the editor responsible for this story: Paul Panckhurst in Hong Kong at ppanckhurst@bloomberg.net
Chinese Premier Wen Jiabao
Tomohiro Ohsumi/Bloomberg
Wen Jiabao, China's premier, said in March that tackling inflation is China’s top priority.
Wen Jiabao, China's premier, said in March that tackling inflation is China’s top priority. Photographer: Tomohiro Ohsumi/Bloomberg
June 15 (Bloomberg) -- Stephen Roach, non-executive chairman of Morgan Stanley Asia, talks about China's economy and central bank monetary policy. Roach also discusses the outlook for the global economy and the selection of a new International Monetary Fund managing director. He speaks from Shanghai with John Dawson on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)
June 14 (Bloomberg) -- Shen Jianguang, a former International Monetary Fund economist now at Mizuho Securities Asia Ltd. in Hong Kong, talks about China's economy, currency and central bank monetary policy. China raised banks’ reserve requirement ratio by 50 basis points effective June 20, the People’s Bank of China said on its website today. Shen spoke from Hong Kong with Linzie Janis on Bloomberg Television's "First Look" before China announced the policy move. (Source: Bloomberg)
June 14 (Bloomberg) -- John Tang, China strategist at UBS AG, talks about his investment strategy for the nation's stocks. Tang also discusses China's economy and central bank monetary policy. He speaks in Hong Kong with John Dawson on Bloomberg Television's "First Up." (Source: Bloomberg)
June 14 (Bloomberg) -- Stephen Green, head of China research at Standard Chartered, talks about the nation's economy and central bank monetary policy. Green speaks with John Dawson on Bloomberg Television's "First Up." (Source: Bloomberg)
Rate this Page
Bloomberg moderates all comments. Comments that are abusive or off-topic will not be posted to the site. Excessively long comments may be moderated as well. Bloomberg cannot facilitate requests to remove comments or explain individual moderation decisions.