China's high inflation limits policy response to global crisis

China’s inflation accelerated to the fastest pace in three years in July, limiting the scope for monetary easing to support growth as plunging stock markets signal the global recovery is weakening.

Consumer prices climbed 6.5 per cent from a year earlier as food costs surged, reports from the Beijing-based National Bureau of Statistics showed on Tuesday. That was more than the 6.4 per cent median estimate in a Bloomberg News survey of 26 economists. In June, inflation was 6.4 per cent.

Elevated inflation shows that China is still dealing with the after-effects of an unprecedented monetary expansion during the last global slump and may have limited room for more stimulus. At the same time, a weaker-than-forecast gain in industrial production added to signs that a moderation in economic growth may help to cool price pressures.

“This is the kind of data that should trigger an interest rate hike, but the uncertainties in global financial markets may delay the action,” said Yao Wei, a Hong Kong-based economist with Societe Generale SA.

The benchmark Shanghai Composite Index closed almost unchanged after tumbling into a bear market yesterday on a widening European debt crisis and Standard & Poor’s downgrade of the US debt rating. Twelve-month non-deliverable yuan forwards fell 0.3 per cent to 6.4 per dollar as of 5.02 pm in Hong Kong.

INDUSTRIAL PRODUCTION
Industrial output rose 14 per cent in July from a year earlier, less than the 14.6 per cent median forecast in a survey of economists and a 15.1 per cent gain in June. Retail sales rose 17.2 per cent, the statistics bureau said on its website on Tuesday.

Fixed-asset investment excluding rural households climbed 25.4 per cent in January-through-July from a year earlier, the agency said.

Production, investment and sales data were “quite resilient, suggesting China is on track for a soft landing,” Lu Ting, a Hong Kong-based economist with Bank of America Merrill Lynch, said in a research note. The slowdown in retail sales was mainly driven by a decline in vehicle demand, with non-auto retail sales “robust” at around 18 per cent, he said.

The China Association of Automobile Manufacturers last month pared its forecast for the world’s largest auto market, saying vehicle sales may grow about five per cent instead of its earlier estimate of 10-15 per cent. Inflation may further damp the industry’s sales, said Matthew Tsien, executive vice president of General Motors Co’s China unit.

“What it will lead to in the near term may be more modest levels of growth, maybe even flat growth for a period of time,” Tsien said in an interview in Chengdu on Tuesday. GM’s China deliveries fell 1.8 per cent to 173,398 vehicles in July.

China’s producer prices rose 7.5 per cent in July from a year earlier, the biggest gain in almost three years, after jumping 7.1 per cent the previous month, on Tuesday’s reports showed. Food costs climbed 14.8 per cent and non-food inflation was 2.9 per cent. Pork jumped 57 per cent.

Merrill Lynch’s Lu said that the ruling Communist Party is unlikely to ease monetary policy and may have a fiscal response, including more spending on social housing and water infrastructure. Banks already face risks from lending to local- government financing vehicles.

“In case the global economy slows down sharply, it will hurt Chinese exports and consumption, and the room for China to stimulate itself out of the problem will be smaller than 2008/09,” Vincent Chan and Peggy Chan, Hong Kong-based analysts at Credit Suisse Group AG, said in a report yesterday. “There is no escape.”

‘OVERWHELMING FORCE’
European Central Bank purchases of Spanish and Italian government debt and pledges by the Group of Seven nations and the G-20 to support financial stability are yet to quell investors’ concern that the global recovery is fading away.

Europe’s debt crisis is “nowhere near an end game,” Harvard University economist Kenneth Rogoff said on Bloomberg Television on Tuesday, adding that policy makers need to act with “overwhelming force.” In the US, the Federal Reserve is likely to embark on a third round of asset purchases, he said.

The Chinese government has already paused for eight weeks in raising banks’ reserve requirements, the longest gap since the latest series of increases began in November, as smaller businesses complain of funding shortages. Interest rates rose as recently as last month.

“Beijing will obviously be worried about external weakness and global market volatility, but with inflation still too high for comfort we continue to expect one more rate hike in the next few months,” said Brian Jackson, a Hong Kong-based emerging- market strategist at Royal Bank of Canada.