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China announces inflation jump

China announced a jump in inflation yesterday that, combined with a near-record trade surplus, heightened expectations the government may raise interest rates and adopt other tightening measures.

The consumer price index, the main gauge of inflation, rose 2.7 percent last month compared with a year ago, just below the 3 percent upper limit set by the central government, the National Bureau of Statistics reported.

"The central bank will wait for a situation to emerge where the inflationary pressure is really obvious before hiking interest rates," said Sun Fanghong, a Shenzhen-based analyst with Ping An Securities.

"But if the trend continues upwards in March, then the chance of a rate hike is very big," Sun said.

The inflation figure compared with a 2.2 percent increase in January, and an unexpected spike of 2.8 percent in December.

Consumer prices rose 1.5 percent last year for full-year.

SLOWDOWN

After posting growth of 10.7 percent last year -- the fourth consecutive year of double-digit expansion -- China's leadership has already indicated it wants a slowdown and last month's data suggest how tough a task it is.

But economists said one reason why the central bank would probably want to wait and see before doing anything drastic was the seasonal character of last month's outcome.

The Lunar New Year holiday, a consumer fest for virtually all 1.3 billion Chinese, fell last month this year, and in January last year, explaining why year-on-year price rises were slightly skewed.

The festival was especially reflected in steep rises in the price of food, which makes up a sizeable portion of the average consumer basket.

The price of meat was up 15.4 percent last month from a year earlier, while eggs were 30 percent more expensive.

The inflation figures came after China unveiled on Monday last month's trade surplus was US$23.8 billion, its second-largest monthly total in history.

Given China's special managed forex regime, which aims to prevent the currency soaring uncontrollably, the US$23.8 billion surplus translates into an increase in local liquidity on a near one-for-one basis.

China can seek to rein in liquidity via the issuance of debt instruments to mop up the money coming from the trade surplus and investment inflows, but it is an ever more complex and costly operation, and some sort of additional step is likely to be taken, according to analysts.

COMING SOON

"We judge that the next round of tightening measures -- including trade policies to reduce the surplus, hikes in the reserve requirement ratio and window guidance -- may come soon," Lehman Brothers said in a research note.

Separately, China's target for its urban unemployment rate will increase to 4.6 percent this year as growing numbers of college graduates put new pressure on the job market, the labor minister said yesterday.

Tian Chengping (田成平) said China aims to create 9 million new jobs and find work for an additional 5 million people laid-off from moribund state industries.

Tian said urban unemployment was at 4.1 percent last year, but experts say that taking the underemployed and others without formal jobs the real rate is over 20 percent.

China's growing population and the migration of farmers to cities are also creating job pressure, but the rise in college graduates from 4.13 million last year to 4.95 million this year is creating new complications, Tian said.

"It's still a pretty grim picture when it comes to employment and job creation," Tian told a news conference on the sidelines of the National People's Congress.
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