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China's January inflation eases to 1.5%

(Agencies/China Daily/chinadaily.com.cn)
Updated: 2010-02-11 13:59

A spike in China's inflation eased in January, reducing pressure for Beijing to hike interest rates and cool surging prices as it tries to keep a recovery in world's third-largest economy on track.

Consumer prices climbed 1.5 percent over a year earlier, the National Bureau of Statistics reported Thursday. That was down from December's 1.9 percent rise, the highest rate in nearly two years.

The decline suggested Beijing can put off taking drastic steps such as a rate hike that would have global repercussions if it slowed China's recovery and cooled rising Chinese demand for imported industrial raw materials and consumer goods.

"This may cap expectations that interest rates will be hiked in the short term," said Sebastien Barbe, head of emerging market research and strategy with Credit Agricole Corporate and Investment Bank, formerly Calyon.

Lin Songli, analyst with Guosen Securities, however, insisted that the central bank is likely to increase interest rates before the end of the first quarter.

Ba Shusong, a renowned economist with the Development Research Center under the State Council, the government's think-tank, said the central bank might raise the interest rate when the CPI increase exceeds 2.25 percent, the current one-year benchmark deposit rate, according to chinanews.com.cn.

"The inflation data surprised us because it was a lot lower than the market expected," said economist Liu Qiyuan of China Merchant Securities. Liu said it showed government orders to Chinese banks to curb lending without hiking rates appeared to be working and should keep inflation below 4 percent for the year.

Chinese leaders worry that last year's stimulus-driven surge in government spending and bank lending might be fueling inflation and a dangerous bubble in real estate and stock prices. Banks were told in January to set aside more reserves to avert a renewed surge in credit but regulators have tried to avoid more drastic measures.

January lending by Chinese banks totaled 1.4 trillion yuan ($200 billion) after credit curbs were imposed mid-month, the central bank reported Thursday. That was nearly one-fifth of the planned total for 2010 but reflected a sharp slowdown after state media said institutions lent 600 billion yuan ($88 billion) in the first week of January alone.

China's biggest lender, state-owned Industrial and Commercial Bank of China, said this week it will curb lending to real estate and industrial projects. State media say other banks imposed temporary lending moratoriums in January to restrain credit growth.

Also Thursday, the government said housing prices rose 9.5 percent in January from a year earlier in 70 large and medium-size Chinese cities. That was 1.7 percentage points higher than December's housing price rise, or the highest increase in 21 months.

Housing prices increased 1.3 percent from December in these cities, 0.2 percentage points lower than December's month-on-month rise.

Notably, housing prices in Hainan skyroketed in January, driven up by the plan to turn the tropical southern island in China into an international tourist resort by 2020. Sanya and Haikou, two major cities on the island, led the national increase in housing prices.

The government declared China recovered from the global crisis after economic growth accelerated to 10.7 percent in the final quarter of 2009. But authorities say the global outlook is still uncertain and stimulus measures will continue.

Related readings: China Biz & Economic Statistics
Related readings: China's Jan CPI up 1.5%, PPI up 4.3% China's housing prices up 9.5% in Jan China reports 1.39t yuan of new loans in January China's CPI to grow 3% in 2010: CCB report Rate of inflation 'still low'

The government indicated in January it was broadening its focus from stimulus to include controlling inflation, which authorities said had to be watched closely.

Analysts say Beijing is likely to raise rates this year. But they say it probably will wait until the Federal Reserve raises US rates, which China would take as confirmation the American and global economies are recovering.

January inflation was driven by a 3.7 percent rise in politically sensitive food costs, including a 17.1 percent jump in vegetable prices. But that was down slightly from December's 5 percent food inflation.

Other data, however, showed there is still a danger of new price surges.

Wholesale inflation in January accelerated to 4.3 percent, up from December's 1.7 percent rate, meaning consumers might face further price hikes as retailers pass on higher costs.

China was the healthiest major economy heading into the crisis in 2008 and was widely expected to be the first to emerge. Its banks were unhurt by mortgage-related turmoil that battered Western lenders and government debt was low compared with other major economies.

That gave Beijing latitude to launch a 4 trillion yuan ($586 billion) stimulus that pumped money into the economy through public works spending, tax cuts, subsidies to car buyers and aid to industries.