China inflation seen up at 5.4 pct in May, risks rate rise

By Kevin Yao

BEIJING, June 14 (Reuters) – China’s inflation probably accelerated in May to 5.4 percent, adding to the case for the central bank to tighten monetary policy further even as there are signs that economic growth is slowing down.

Bringing inflation under control remains the top priority for Chinese leaders, who see little chance of the current slowdown from 2010 growth of more than 10 percent turning into a hard landing.

“We think the current cycle of inflation is more sticky and persistent. So it’s still important for policymakers to stick to prudent monetary policy,” said Wei Yao, China economist at Societe Generale in Hong Kong.

China is due to release a flurry of economic data on Tuesday covering the month of May, including its consumer price index, industrial output figures, retail sales and fixed-asset investment.

China’s annual inflation rate is expected to have edged up to 5.4 percent in May from 5.3 percent in April, a Reuters poll shows. Such a reading would match a 32-month high seen in March.

Yao expects May inflation to rise to a 34-month high of 5.6 percent, prompting the central bank to raise interest rates this month for the fifth time since October.

“For policy makers, they should be careful about inflation, especially inflation expectations given that a lot of supply side issues remain in China,” she added.

Inflation has largely been fuelled by a rise in food prices, exacerbated of late by a severe drought in farming heartlands. Some economists say inflation is also the result of China’s massive stimulus during the global financial crisis.

Like elsewhere, China is coping with a rise in global commodity prices, which are adding to inflationary concerns for policymakers.

China’s central bank has already raised banks’ required reserves eight times and lifted interest rates four times since October to quell inflation. But it may not be enough.

Several analysts predict that inflation will keep rising to around 6 percent in June, which some say will make it difficult for the government to achieve its 4 percent average inflation target for the year.

 

Like Yao, Mingchun Sun, economist at Daiwa Capital Markets, expects the central bank, the People’s Bank of China (PBOC), to raise rates this month by 25 basis points.

That would take the one-year lending rate to 6.56 percent and the one-year deposit rate to 3.50 percent.

“The PBOC is likely to have no choice but to maintain tightening over the coming months,” he said in a research note.

Zhang Zhuoyuan, an economist at the Chinese Academy of Social Sciences, a top government think-tank, expects inflation to top 6 percent in June and called for faster steps to push real interest rates into positive territory.

One-year bank deposit rates of 3.25 percent suggests that Chinese are losing money by keeping it in a bank, running the risk that more Chinese will shift their funds into riskier investments, such as property or stocks.

 

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China’s economy expanded in 2010 by 10.3 percent, a pace that slowed in the first quarter to 9.7 percent.

But data has suggested a further slowdown in the economy since then. Purchasing managers’ surveys showed the factory sector expanded in May at it slowest pace in at least nine months.

Worryingly for financial markets, China’s slowdown has occurred alongside a weakening of global growth as Europe struggles with its debt crisis and the United States contends with stubbornly high unemployment. An earthquake has knocked Japan into recession.

China’s trend is expected to be underlined by the May industrial output figures. A Reuters poll forecast annual growth would slow to 13.2 percent, which would be the weakest pace since October last year. January and February output figures were combined and showed a rise of 14.1 percent over a year earlier.

China’s money growth slowed to a 30-month low in May and banks extended fewer new loans than expected, data on Monday showed.

Most analysts expect monetary policy to remain tight this year as China focuses on controlling inflation, although Sun at Daiwa saw other risks as the economy slows.

“The chance of policy loosening is low before September despite rising risks of an economic hard-landing in the four-quarter of 2011,” Sun said. (Editing by Neil Fullick)