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Chinese inflation jump sparks rare market reaction

China's inflation rate jumped to 3.4 percent last month from a year earlier, official data showed yesterday, raising speculation of further cooling measures and triggering a rare reaction in the stock market.

The rise, the highest since February 2005, was announced amid heightened market alert over possible government moves, sending share prices falling, with the benchmark index ending the morning down 0.60 percent.

"The high inflation rate is expected to prompt another interest rate hike by the central bank very soon," said Wu Dazhong, an analyst at Shenyin Wanguo Securities.

The central bank had already hiked interest rates twice this year and on five occasions required commercial banks to set aside more money in reserve to cool inflation, fixed-asset investment and stock market speculation.

food items

May inflation was boosted by an 8.3 percent rise in the price of food items, which make up about one third of the average Chinese consumer basket and in particular by higher costs for the country's favorite meat.

"The reason is quite clear to all -- it's mainly because of pork," said Huang Yiping (黃益平), a Hong Kong-based Citigroup economist.

Pork has risen because of production bottlenecks and a recent outbreak of swine disease.

Last month's figures marked an acceleration from April, when consumer inflation stood at 3 percent and was marginally higher than March's 3.3 percent.

In the first five months of the year, consumer prices were up 2.9 percent from the same period a year ago, said the National Bureau of Statistics, which released the data yesterday.

The government is targeting an inflation rate within 3 percent this year in the fast-growing economy.

Producer and wholesale prices last month, announced on Monday, also showed a rise related to food items.

Producer prices last month rose 2.8 percent, while prices associated with food production were up 6.3 percent.

exception

It was unusual for Chinese stocks to react to announcements of macro economic figures, unlike in more developed countries, but yesterday marked an exception.

Just prior to the announcement of last month's data, the key stock index was up 0.53 percent but minutes later was down 0.11 percent.

"It's the expectation of more tightening of monetary policies," Ning Dongli, a Shanghai-based equity strategist with Orient Securities, said of the reasons for the stocks downturn.

This could reflect growing sensitivity in the financial markets following a recent show of the power that policy makers still wield over the Chinese economy, if they decide to pull the levers hard enough.

Late last month, the government tripled the stamp tax on stock transactions, causing the biggest point decline ever in the share market.

more hikes

Central bank governor Zhou Xiaochuan (周小川) was quoted in the state press last week as saying interest rates could again be increased if inflation was too strong.

"We continue to believe that they will hike both the lending and deposit rates twice in the rest of the year [by 27 basis points each time]," Goldman Sachs said in a research note.

However policy makers in Beijing may be quietly satisfied with the rise in food prices, as it helps promote a fundamental policy of evening out income inequalities in China, some analysts said.
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