China Inflation Quickening to 6.5% Limits Policy Response to Global Crisis

China’s inflation accelerated to the fastest pace in three years in July, limiting the scope for monetary easing to support growth as plunging stock markets signal the global recovery is weakening.

Consumer prices climbed 6.5 percent from a year earlier as food costs surged, reports from the Beijing-based National Bureau of Statistics showed today. That was more than the 6.4 percent median estimate in a Bloomberg News survey of 26 economists. In June, inflation was 6.4 percent.

Elevated inflation shows that China is still dealing with the after-effects of an unprecedented monetary expansion during the last global slump and may have limited room for more stimulus. At the same time, a weaker-than-forecast gain in industrial production added to signs that a moderation in economic growth may help to cool price pressures.

“This is the kind of data that should trigger an interest rate hike, but the uncertainties in global financial markets may delay the action,” said Yao Wei, a Hong Kong-based economist with Societe Generale SA.

The benchmark Shanghai Composite Index closed almost unchanged after tumbling into a bear market yesterday on a widening European debt crisis and Standard & Poor’s downgrade of the U.S. debt rating. Twelve-month non-deliverable yuan forwards fell 0.3 percent to 6.4004 per dollar as of 5:02 p.m. in Hong Kong.

Industrial Production

Industrial output rose 14 percent in July from a year earlier, less than the 14.6 percent median forecast in a survey of economists and a 15.1 percent gain in June. Retail sales rose 17.2 percent, the statistics bureau said on its website today.

Fixed-asset investment excluding rural households climbed 25.4 percent in January-through-July from a year earlier, the agency said.

Production, investment and sales data were “quite resilient, suggesting China is on track for a soft landing,” Lu Ting, a Hong Kong-based economist with Bank of America Merrill Lynch, said in a research note. The slowdown in retail sales was mainly driven by a decline in vehicle demand, with non-auto retail sales “robust” at around 18 percent, he said.

The China Association of Automobile Manufacturers last month pared its forecast for the world’s largest auto market, saying vehicle sales may grow about 5 percent instead of its earlier estimate of 10-15 percent. Inflation may further damp the industry’s sales, said Matthew Tsien, executive vice president of General Motors Co.’s China unit.

Flat Growth

“What it will lead to in the near term may be more modest levels of growth, maybe even flat growth for a period of time,” Tsien said in an interview in Chengdu today. GM’s China deliveries fell 1.8 percent to 173,398 vehicles in July.

China’s producer prices rose 7.5 percent in July from a year earlier, the biggest gain in almost three years, after jumping 7.1 percent the previous month, today’s reports showed. Food costs climbed 14.8 percent and non-food inflation was 2.9 percent. Pork jumped 57 percent.

Merrill Lynch’s Lu said that the ruling Communist Party is unlikely to ease monetary policy and may have a fiscal response, including more spending on social housing and water infrastructure. Banks already face risks from lending to local- government financing vehicles.

“In case the global economy slows down sharply, it will hurt Chinese exports and consumption, and the room for China to stimulate itself out of the problem will be smaller than 2008/09,” Vincent Chan and Peggy Chan, Hong Kong-based analysts at Credit Suisse Group AG, said in a report yesterday. “There is no escape.”

‘Overwhelming Force’

European Central Bank purchases of Spanish and Italian government debt and pledges by the Group of Seven nations and the G-20 to support financial stability are yet to quell investors’ concern that the global recovery is fading away.

Europe’s debt crisis is “nowhere near an end game,” Harvard University economist Kenneth Rogoff said on Bloomberg Television today, adding that policy makers need to act with “overwhelming force.” In the U.S., the Federal Reserve is likely to embark on a third round of asset purchases, he said.

The Chinese government has already paused for eight weeks in raising banks’ reserve requirements, the longest gap since the latest series of increases began in November, as smaller businesses complain of funding shortages. Interest rates rose as recently as last month.

“Beijing will obviously be worried about external weakness and global market volatility, but with inflation still too high for comfort we continue to expect one more rate hike in the next few months,” said Brian Jackson, a Hong Kong-based emerging- market strategist at Royal Bank of Canada.

Weakening Growth

UBS AG and Standard Chartered Bank forecast no more rate increases this year.

The good news for policy makers is that inflation has likely peaked, according to analysts at lenders including Standard Chartered. Consumer-price gains may ease to 4 percent by year-end on smaller increases in food costs, UBS says.

Weakening global growth may also help to tame price pressures as costs for commodities tumble. In New York, oil headed today for its biggest two-day plunge in more than two years as Brent tumbled below $100 a barrel.

In China, there are signs officials are confident that inflation will ease. Cooking oil supplier Wilmar International Ltd. (WIL) has been allowed to raise prices after saying in April that the government had asked it to hold off. The Singapore-based company announced increases of about 5 percent on Aug. 2.

Mizuho Securities Asia Ltd. estimates that full-year average inflation will be 5.3 percent, 1.3 percentage points higher than the government’s target. The People’s Bank of China said Aug. 1 that it was too early to loosen monetary policy because of the risk that inflation may accelerate.

--Nerys Avery, Paul Panckhurst and Zheng Lifei, with assistance from Patrick Harrington in Tokyo, Susan Li in Hong Kong and Liza Lin in Chengdu. Editors: Paul Panckhurst, Nerys Avery.

To contact the reporter on this story: Nerys Avery in Beijing at navery2@bloomberg.net

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

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