China Inflation Reaches 11-Year High, Trade Gap Grows (Update3)

By Nipa Piboontanasawat


Dec. 11 (Bloomberg) -- China's inflation accelerated at the quickest pace in 11 years and the trade surplus swelled, underscoring government concern that the world's fastest-growing major economy is at risk of overheating.

Consumer prices rose 6.9 percent in November from a year earlier after climbing 6.5 percent in October, the statistics bureau said today. That was more than the 6.5 percent median estimate of 21 economists surveyed by Bloomberg News.

The government tightened rules for real-estate lending and ordered state-owned companies to pay dividends after the trade surplus pumped a record $238 billion into the economy in the first 11 months. U.S. Treasury Secretary Henry Paulson is in Beijing to press for yuan gains that would narrow the trade gap and staunch the inflow of cash.

``Liquidity from the trade surplus will continue to cause the economy to overheat in 2008,'' said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong.

The yuan gained by the most in a month against the dollar. The currency, which has climbed 12 percent since a fixed exchange rate was scrapped in July 2005, rose 0.2 percent to 7.3805 per dollar as of the 5:30 p.m. close in Shanghai from 7.3952 late yesterday. It touched 7.3770, the highest since the end of the dollar link.

`Tight' Monetary Policy

The yield on the 4.68 percent bond due September 2022 rose 4 basis points, or 0.04 percentage point, to 4.72 percent.

The central bank will strictly control bank lending, raise interest rates this month and allow a faster pace of currency appreciation in 2008, said Liang Hong, a senior economist at Goldman Sachs Group Inc. in Hong Kong.

Chinese regulators today published instructions to banks to tighten lending for home purchases, citing lessons from Asian property bubbles and the U.S. subprime crisis. Inflation higher than returns on bank deposits is encouraging speculation, fueling a 9.5 percent jump in property prices in 70 cities in October from a year earlier, the biggest gain since 2005.

The Ministry of Finance said state-owned companies will be required to pay dividends of as much as 10 percent of their profits to the government. That may help curb what China's cabinet terms ``excessive'' growth in fixed-asset investment, reducing the risk of industrial overcapacity.

`Noise From Beijing'

``There is certainly a lot of noise coming from Beijing at the moment about limiting credit growth and today's measures are part of it,'' said Mark Williams, an economist at Capital Economics Ltd. in London. ``Unfortunately, attempts to limit the volume of lending are easily circumvented.''

The trade surplus climbed 14.7 percent to $26.3 billion in November from a year earlier, the third-biggest monthly total, the customs bureau said today. The $15.2 billion trade surplus with the U.S. pushed the 11-month total with that country to $149.2 billion.

China's economy, the biggest contributor to global growth, expanded 11.5 percent in the first nine months of 2007 from a year earlier. The government has flagged a shift to a ``tight'' monetary policy in 2008 from the previous ``moderate tightening.''

The People's Bank of China last week ordered lenders to set aside 14.5 percent of deposits as reserves, up from 13.5 percent. China's one-year lending rate is at a nine-year high of 7.29 percent after five increases this year.

Zhou Xiaochuan, the central bank governor, said today that currency policy will be used to help narrow the trade gap.

Export Growth

A stronger yuan would lower import costs and push up export prices. Export growth has already slowed from 29 percent in the seven months through July to between 22 percent and 23 percent for each of the past four months, after cuts to tax incentives.

``A more flexible currency is especially important now, when the risks of inflation are clearly rising in the Chinese economy,'' Paulson said last week. The Treasury Secretary, in Beijing for the so-called Strategic Economic Dialogue, is fending off calls in Congress for legislation to punish China for its currency policy.

The inflation rate is almost double the 3.5 percent pace in the U.S. in October. It's also more than the 3.01 percent increase in wholesale prices in India, the key inflation measure for the world's second-fastest growing economy, in the week ended Nov. 24.

China's inflation was 4.6 percent in the first 11 months, more than the central bank's 3 percent target for the year and the key one-year deposit rate of 3.87 percent.

Pork prices surged 56 percent in November from a year earlier, driven by a shortage of pigs. Food makes up a third of the consumer price index and rising costs pose a threat to social stability, illustrated by a stampede last month at a cooking-oil sale that killed three people in the central city of Chongqing.

Overall, food climbed 18.2 percent. Non-food prices rose 1.4 percent, accelerating from a 1.1 percent gain in the previous month. Utility prices including water, electricity and gas rose 5.6 percent.