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Wed, Sep 12, 2007 - Page 10 News List

China posts a 6.5% jump in inflation

RUNAWAY ECONOMY Analysts said that rising prices and another surge in the trade surplus could prompt another round of interest rate increases


China's inflation hit its highest rate in almost 11 years last month, while the nation's trade surplus soared again, official data showed yesterday, signaling more interest rate hikes.

Propelled by soaring food costs, the consumer price index rose 6.5 percent last month from a year earlier, the National Bureau of Statistics said, well above the official full-year target of 3 percent and the highest since December 1996.

Meanwhile, customs data showed the trade surplus hit US$24.97 billion last month, the second-highest on record after June's US$26.91 billion, adding more fuel to trade tensions with the US and Europe.

Economists said the government would act quickly to tame the runaway economy despite already raising interest rates four times this year.

"We expect the central bank to respond to higher inflationary pressures with decisive tightening measures, including two interest rate hikes [by the end of the year]," Goldman Sachs economist Hong Liang (梁紅) said.

Economists said they expect other measures as well, including a rise in the amount of money banks must keep in reserve, which is aimed at slowing lending and reducing the amount of cash in the economy.

China has already hiked the bank reserve ratio seven times this year. Its economy has so far shrugged off such cooling measures, growing 11.9 percent in the second quarter of this year and 11.5 percent in the first half.

Premier Wen Jiabao (溫家寶) warned last week about the danger of overheating. State media also quoted central bank Governor Zhou Xiaochuan (周小川) yesterday as saying the economic landscape pointed to further aggressive action by the government.

"Fighting inflation is our objective," he was quoted as saying by the China Business News. "The central bank may continue to [tighten monetary policy]."

Last month's inflation figure was fueled in large part by an 18.2 percent rise in food prices, including a 49 percent surge in the cost of meat, the statistics bureau said.

Meat prices are a key concern for Chinese families, who on average spend about one-third of their income on food.

The price of pork, a staple of most Chinese diets, has risen sharply this year due to rising feed prices and a massive pig cull sparked by a respiratory swine disease outbreak.

In May, Wen called for steps to stabilize pork supplies and prices, warning "social stability" was at stake.

Economists said taming food prices remained a top priority as the Chinese Communist Party prepared for its five-yearly leadership Congress next month, a politically sensitive time when social stability is paramount.

Meanwhile, economists said that last month's trade surplus, 32.8 percent higher than the same month last year, would stoke tensions with China's major trading partners.

Last month's figure brought the surplus for the first eight months of the year to US$161.76 billion, within striking distance of last year's record full-year surplus of US$177.47 billion.

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