UPDATE 2-Jump in China inflation keeps focus on tightening

* CPI up 5.1 pct y/y (Oct 4.4 pct; forecast 4.7 pct

* PPI up 6.1 pct y/y (Oct 5.0 pct; forecast 5.2 pct

* C.bank expected to raise interest rates to tame inflation

(Adds quotes, details)

By Aileen Wang and Simon Rabinovitch

BEIJING, Dec 11 (BestGrowthStock) – Chinese inflation soared past
forecasts to a 28-month high in November and showed signs of
spreading beyond food prices, putting pressure on the
government to ratchet up its monetary tightening.

A day before the data, China’s central bank raised
lenders’ reserve requirements for the third time in a month to
sop up some of the excess cash in the economy that is driving
prices higher. With inflation on the march, analysts said that
more resolute action was needed.

“At least one interest rate rise is needed for this year,
otherwise authorities will give the public quite a surprising
message, because if you see inflation but no rate hike, people
will doubt the determination to fight inflation,” said Shen
Jianguang, economist with Mizuho Securities in Hong Kong.

The data published on Saturday should give the Chinese
government the confidence to intensify its tightening, because
all signs pointed to impressive growth momentum in the world’s
second largest-economy.

Industrial output rose 13.3 percent year-on-year in
November, rebounding from a mild dip in October and outpacing
market expectations. Capital spending also topped forecasts,
rising 24.9 percent in the first 11 months of 2010 from the
same period a year earlier.

In an indication that China is slowly continuing its shift
to a more consumption-powered economy, retail sales increased
18.7 percent in November from a year earlier.

The data on Saturday, which had been widely leaked in the
Chinese market beforehand, followed hefty increases in exports
and bank lending that were reported on Friday. [ID:nTOE6B901S]

“The numbers show that the economy is relatively hot.
Exports were strong, beating expectations, and investment
remained high,” Liu Yuhui, a researcher at the Chinese Academy
of Social Sciences. “The strength of economic tightening so
far has not been as strong as people thought.”

INFLATION WORRY

For all the signs of strength, worries will centre on
whether inflation is beginning to slip from Beijing’s grasp.

“Current administrative measures to control inflation can
depress prices for a while, but rebounds will take place once
the measures are relaxed,” said Lin Songli, an economist with
Guosen Securities in Beijing.

Several Chinese cities have implemented direct controls to
limit food price increases, while the central government has
also vowed strong action to eliminate speculation in the
country’s commodity markets and punish anyone found to be
manipulating food prices.

Food once again was the primary driver of inflation. The
cost of food rose 11.7 percent in the year to November, while
non-food prices were up just 1.9 percent. But within the
non-food category, consumer goods and housing costs registered
clear jumps.

“My worry for inflation is that we are seeing a very clear
trend of non-food prices increasing. This is consistent with
very strong wage increases this year, global commodity prices
increasing and very strong money and credit expansion,” Shen
said.

LOOKING AHEAD

The National Development and Reform Commission, a powerful
central planning agency, was more confident in its outlook.

In a statement after the data, it said that November’s
consumer inflation represented a peak and that the annual pace
would fall below 5 percent this month. However, it cautioned
that prices would remain elevated in the first quarter next
year.

China’s leaders are meeting this weekend in the Central
Economic Work Conference to discuss the policy direction for
next year.

The Politburo, the Communist Party’s ruling body, set the
tone for the meeting last week when it announced a shift to a
“prudent” monetary policy from the “appropriately loose”
stance of the past two years.

Many in the market believe the change in wording could
pave the way for a more aggressive course of interest rate
increases and lending restrictions. China has raised banks’
required reserves six times this year, but increased interest
rates only once.
(Additional reporting by Zhou Xin; Editing by Ken Wills and
Alex Richardson)

UPDATE 2-Jump in China inflation keeps focus on tightening