Economy

CPI hits 19-month high but not all see tighter policy

(Agencies)
Updated: 2010-06-11 13:46

BEIJING: China's consumer price index rose to a 19-month high in May, but a moderation of growth in factory production and capital spending could further ease worries that the world's third-largest economy runs the risk of boiling over.

Consumer prices rose 3.1 percent in the year to May compared with a 2.8 percent annual rise in April, confirming a Reuters report from Wednesday and exceeding the official year-average target of 3 percent.

However, a spokesman for the National Bureau of Statistics, which released the data on Friday, said price pressures were easing and expressed confidence that Beijing should be able to hit its inflation goal.

Related readings:  Govt bonds decline on inflation report jitters  CPI rises 3.1% in May  China's May PPI up 7.1%  Price hikes in certain basic goods fuel inflation fears

The statistics office also reported that annual industrial output growth slowed to 16.5 percent in May from 17.8 percent in April, while year-to-date investment in urban areas in fixed assets such as flats and factories eased to 25.9 percent from 26.1 percent.

Zhang Lei, an economist with Bohai Securities in Tianjin, said it was unlikely that China would tighten policy further given that underlying inflationary pressures were easing and robust economic growth was likely to keep slowing.

"In fact, if the economy cools down at a faster rate than expected, the government may have to relax its policies," he said.

Others disagreed, saying they still expected the People's Bank of China to raise interest rates at some point.

Unlike some Asia-Pacific neighbors such as India, Australia and Malaysia, China has kept its benchmark rates unchanged this year, preferring more targeted measures to curb prices such as a crackdown on property speculation.

"Although CPI growth shows signs of stabilizing from last month, it has exceeded the PBOC's limit. If it continues to rise in June, an interest rate increase is possible," said Chen Xingyu, an analyst with Phillip Securities Research in Shanghai.

Figures released by the central bank showed the success of its efforts to normalize monetary policy after a record government-orchestrated credit spree last year to help the economy weather the global downturn.

The pace of bank lending and money supply growth slowed, with new local currency-denominated loans extended in May falling to 639.4 billion yuan from 774 billion in April.

"Beijing would like to delay tightening policy further until it gets a clearer read of the property market and the fallout from Euro-area weakness, but this strategy is risky given the near-term outlook for inflation," said Brian Jackson, a strategist with Royal Bank of Canada in Hong Kong.

"We expect to see higher lending rates and a stronger currency in the months ahead."

China on Thursday reported a near 50 percent annual jump in exports and imports in May, reassuring investors about the economy's strength but putting pressure on US President Barack Obama to placate critics who say Beijing is keeping the yuan currency unfairly undervalued.

Treasury Secretary Timothy Geithner indicated on Thursday that US patience on China's currency policy was wearing thin and a key lawmaker warned that he would move soon on legislation that would penalize Chinese goods.