China Inflation Over 3.5% May Prompt Rate Rise: NDRC Chen

China may need to raise interest rates should gains in the consumer-price index stay at more than 3.5 percent for three months, a senior researcher affiliated with the country’s top planning agency said.

“In theory, if CPI remains above 3.5 percent for three months, there should be an interest-rate movement,” Chen Dongqi, the deputy head of the National Development and Reform Commission’s macroeconomic research institute, said in an interview yesterday after a speech at Tsinghua University in Beijing. “But it also can be decided by authorities’ own judgment.”

Speculation that China will raise interest rates for the first time since mid-2011 is rising as the world’s second-largest economy recovers from the weakest growth in 13 years, credit expands and property prices rebound. Premier Wen Jiabao this week set a 3.5 percent inflation goal for 2013, down from 4 percent last year, after price gains slowed to half the pace of 2011.

“The timing of China’s interest-rate increase will depend on the CPI situation,” Chen said. “It could happen late this year or early next year or even later.”

Consumer inflation may have accelerated to 3 percent last month, according to the median analyst forecast before data due on March 9. It was 2 percent in January and 2.6 percent for all of 2012. The median forecast of 40 economists is for a 3.1 percent rise in 2013.

Policy Aim

An acceleration in inflation in the second half and excessive investment from local governments after this month’s annual meeting of the national legislature are the two biggest risks to China’s economy, Chen said.

Chen said separately in his speech at the Chinese Economists 50 Forum that while the government’s inflation goal is 3.5 percent, the real policy aim should be 3 percent. “If we allow the CPI to reach 3.5 percent or even higher in the late months of this year, it will reduce room for next year’s inflation control,” Chen said.

There are some “structural bubbles” in China’s property market and two ways to deal with the situation, Chen said. “One is to gradually release the steam and the other is to put on a sudden brake.”

Any excessive or hurried tightening may result in “big swings” in economic growth as the property market affects about 30 other industries, he said in the speech.

The country’s new leadership faces the challenge of sustaining a recovery without triggering consumer and asset-price inflation. Wen, who this week set a target of 7.5 percent for growth this year, warned that “unbalanced, uncoordinated and unsustainable development remains a prominent problem.”

The customs administration will today report trade data for February. Exports probably grew 8.1 percent, according to the median estimate in a Bloomberg News survey, down from a 25 percent pace in January.

Data in the first two months of the year are distorted by the timing of the weeklong Lunar New Year holiday, which fell in February this year and in January in 2012.

— With assistance by Xin Zhou

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