China Inflation Surging Past 6% Leaves Wen With ‘Delicate’ Balancing Act

China’s inflation accelerated to the fastest pace in three years, highlighting the challenge for policy makers of sustaining growth while taming prices.

The consumer price index increased 6.4 percent in June, the National Bureau of Statistics said yesterday, exceeding the 6.2 percent median estimate of economists surveyed by Bloomberg News.

The world’s second-biggest economy is already cooling after the government curbed lending by boosting lenders’ reserve requirements to a record and raising interest rates five times since September, most recently on July 6. A deeper-than- anticipated slowdown in China would curtail a global expansion imperiled by a potential default by Greece and signs the U.S. recovery is faltering.

China “is in a delicate position right now,” said David Cohen, a Singapore-based economist for Action Economics Ltd. who previously worked at the U.S. Federal Reserve. The government “wants to remain vigilant on inflation, but they don’t want to slam on the brakes too hard,” Cohen said.

Inflation was mainly driven by a 14 percent gain in food costs and also pushed up by an unfavorable base for comparison a year earlier, an effect that will diminish in the second half. Pork, a Chinese staple, rose 57 percent.

Signs that the economy is cooling include a slide in a manufacturing gauge to a 28-month low in June. China’s expansion may have slowed to 9.3 percent in the second quarter from a year earlier after a 9.7 percent increase in the first three months, according to a Bloomberg News survey. That report is due July 13.

Producer Prices

Producer prices rose 7.1 percent in June from a year earlier, the statistics bureau said yesterday, compared with 6.8 percent in May and the 6.9 percent median estimate in a Bloomberg News survey. Consumer-price inflation compared with 5.5 percent in May.

Non-food consumer prices climbed 3 percent, the biggest gain since at least 2005, yesterday’s report showed. Housing- related costs rose 6.2 percent.

Consumer prices rose 0.3 percent from May, while food costs gained 0.9 percent month-to-month and producer prices were unchanged, the report showed.

Yesterday’s announcement of inflation data was brought forward from July 15 as the statistics bureau moved to cut the risk of leaks.

Wen’s View

Last month, Wen said that China’s economic situation will remain “the world’s best” if growth is about 8 percent or 9 percent and inflation is below 5 percent. He cautioned that, combined with corruption, rising prices can have an “impact on the stability of a political power and the peacefulness of a society.”

Another interest-rate increase is likely if consumer inflation is above 6 percent for more than two months, said Ding Shuang, a senior economist at Citigroup Inc. in Hong Kong who previously worked at China’s central bank. He expects inflation to slow after July.

UBS AG said that the central bank may add to this week’s quarter-point rate increase if inflation is as high next month. Bank of America Merrill Lynch said the chance of another rate increase this year is “very small” with inflation likely to have peaked.

The People’s Bank of China has raised the one-year lending rate to 6.56 percent and the one-year deposit rate to 3.5 percent. The nation’s biggest banks are required to set aside 21.5 percent of deposits as reserves, locking up cash that could fuel inflation.

‘Soft Landing’

“The need to control domestic inflation has complicated the Chinese government’s attempts to engineer a soft landing for the economy,” Jing Ulrich, JPMorgan Chase & Co.’s chairman of global markets for China, said in a research note yesterday. “Aggressive liquidity tightening will likely mitigate inflationary pressure, but also risks stifling economic growth, inducing what some observers have feared could be a ‘hard landing.’”

Shanghai taxi fares rose yesterday, adding to price increases by companies from McDonald’s Corp. (MCD) to Starbucks Corp. While Wen said last month that he sees inflation as “controllable,” he also acknowledged that the government’s 4 percent target for the full year may be out of reach.

Rising food costs aren’t confined to China. Global prices rose 39 percent in June from a year earlier, according to the Food and Agriculture Organization of the United Nations.

“China’s inflation pressures remain strong,” said Liu Li- Gang, who formerly worked for the World Bank and is chief China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. The central bank is likely to raise interest rates again by the end of September, as “very high” producer-price inflation “implies that China’s inflation is unlikely to peak this month,” he said.

--Paul Panckhurst, Sophie Leung. Editors: Paul Panckhurst, Jim McDonald

To contact the reporter on this story: Sophie Leung in Hong Kong at sleung59@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst in Hong Kong at ppanckhurst@bloomberg.net

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