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China Price Gains Pose Risk to Asia’s 2011 Growth, Fitch Says

Inflation in China could hinder Asia’s economic growth and damage the ratings outlook for countries in the region this year, according to Fitch Ratings.

China’s policy makers are likely to face greater difficulty as the world’s fastest-growing major economy battles “hot money inflows” and consumer prices that rose 4.6 percent in December after advancing 5.1 percent in November, Andrew Colquhoun, Senior Director and Head of Asia Pacific Sovereigns, said today.

“If we see evidence inflationary pressures are worse or more intense than we thought, that could lead to slower growth which would be negative for the region,” he said in a telephone interview in Singapore.

Surging prices prompted China’s central bank to raise its lending rate twice last quarter and lift banks’ reserve requirements four times in about two months. Inflation may peak at 6 percent this month as snowstorms damage crops and disrupt transport ahead of the Lunar New Year holiday, Daiwa Capital Markets said in an e-mailed note today.

“Inflation pressures remain elevated and the question is to what extent this is a result of supply bottlenecks and temporary rises in food and commodity prices, or the strong money and credit growth through 2009 and 2010 now showing up in a way that’s going to require sharper monetary tightening than many are expecting,” Colquhoun said.

Price increases may accelerate in nine of 11 emerging Asian economies tracked by Fitch this year as most countries run “near capacity” and import “loose U.S. monetary conditions through currencies linked more or less tightly to the U.S. dollar,” he said.

Currency Appreciation

“Regional currency appreciation against the dollar could help to head off inflationary pressures, but Fitch regards this as unlikely without significant appreciation of the Chinese currency, which the agency does not expect”.

The yuan has appreciated about 3 percent since China announced a policy of greater flexibility in June. Non-deliverable forwards show traders are betting on a 1.9 percent gain in the yuan in the next 12 months.

Fitch expects emerging Asia’s growth to slow to 7.1 percent in 2011 from 8.6 percent last year while inflation is forecast to accelerate to 4.4 percent from 4 percent in 2010.

Outside of China, the other country with rising inflationary pressures is Indonesia, Colquhoun said. Fitch upgraded its debt to BB+, the highest non-investment-grade, with a stable outlook in January 2010.

Indonesian Rating

“Indonesia’s rating is certainly under near-term negative pressure,” he said. “The outlook remains stable but part of the story when we took them up to that in January 2010 was growing confidence in the central bank’s management of monetary policy and inflation, and developments in the second half of 2010 have caused us to question that conclusion.”

Separately, the re-emergence of political tensions in Thailand isn’t a cause for concern, Colquhoun said. Nationalist protesters are blocking a Bangkok street and say they will stay indefinitely to pressure Prime Minister Abhisit Vejjajiva into taking stronger action against neighboring Cambodia over disputed borders. Protests by the same group in 2008 led to deadly clashes and airport closures.

“If there is one thing Tunisia has taught us it’s that political risk can re-erupt surprisingly quickly, and while I would not put Thailand in that category, the situation there is a manifestation of the political risks that we pointed to in April 2009 when we took the rating down to BBB,” he said. “It’s in the headlines at the moment but the demonstrations are within the tolerances of our rating.”

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