Sunday, March 9, 2008

China's Inflation May Surge to 7.9%, Fastest Pace in 11 Years

By Kevin Hamlin

March 10 (Bloomberg) -- China's inflation probably surged to another 11-year high in February on snowstorms that disrupted food supplies, making an interest-rate increase more likely.

Consumer prices rose 7.9 percent from a year earlier, according to the median estimate of 22 economists surveyed by Bloomberg News, after gaining 7.1 percent in January. The statistics bureau will release the figure at 10 a.m. tomorrow.

China is grappling with how to tame inflation without triggering a sharp slowdown as a cooling global economy threatens export growth. Raising rates when the U.S. Federal Reserve has cut them may attract more overseas money into a financial system already flooded with cash.

``It may be better to act early,'' says Michael Dai, a senior economist at Bank of China (Hong Kong) Ltd. ``If inflation climbs to double digits they would have to slam on the brakes very hard.''

Inflation is ``the biggest concern of the people,'' Premier Wen Jiabao told lawmakers at the annual meeting of the National People's Congress last week. Central bank governor Zhou Xiaochuan said ``there is still room'' to raise rates after six increases last year pushed the one-year lending rate to a nine- year high of 7.47 percent.

February's price surge was likely driven by blizzards that disrupted food and fuel supplies, said Paul Tang, an economist at Bank of East Asia Ltd. in Hong Kong.

Producer Prices

``If you take out food and energy prices, inflation remains about 1 percent,'' said Tang. ``So there are worries, but there's still a lack of evidence that inflation has spread to become a general problem.''

Some economists disagree for reasons including accelerating producer prices. February's increase for goods as they leave the factory gate was a three-year high of 6.9 percent, according to the survey.

``The notion that there is nothing to worry about because non-food CPI inflation remains about 1 percent is probably not valid because every other price index seems to suggest some real pricing pressures,'' said James McCormack, head of sovereign ratings at Fitch Ratings in Hong Kong.

China has added price controls this year on some foods, frozen energy prices and quickened the yuan's pace of appreciation, which lowers import costs. Banks' reserve requirements have climbed to a record 15 percent.

Goldman Sachs Group Ltd. economists last week forecast a rate increase ``in coming days.''

Tang said he expects the central bank to wait until the second quarter to avoid sapping investor confidence in the stock market. The benchmark CSI 300 Index has fallen 13 percent this year after climbing 160 percent in 2007.

The following tables show economists' estimates for percentage changes in China's consumer and producer prices in February from a year earlier.

Firm YoY% YoY%
Median 7.9% 6.9%
Average 7.9% 6.8%
High 9.0% 8.0%
Low 7.2% 5.8%
Number of Estimates 22 18
Action Economics 7.8% 8.0%
Bank of America 8.0% --
Bank of China (Hong Kong) 7.5% 6.5%
Bank of East Asia 8.3% 7.0%
CFC Seymour 9.0% 7.1%
CIMB-GK Research 7.8% 7.0%
Citic Securities 7.2% 6.5%
Daiwa Institute of Research 8.4% --
Deutsche Bank 8.2% 6.3%
Forecast Ltd. 7.7% 7.0%
Goldman Sachs 8.5% 6.9%
Hang Seng Bank 7.6% --
High Frequency Economics 7.6% 6.8%
HSBC 8.4% 6.9%
Industrial Bank 7.8% 5.8%
ING Groep NV 7.9% 6.9%
Mitsubishi UFJ Securities 8.0% 6.1%
Moody's 8.0% 7.2%
Natixis 7.8% 6.7%
Royal Bank of Scotland 7.3% --
Shenyin Wanguo Securities 8.1% 7.0%
Standard Chartered Bank 7.6% 6.8%

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