WRAPUP 3-China CPI inflation slows but lending brisk

* Unexpected moderation in Jan CPI inflation to 1.5 pct y/y

* Producer price inflation picks up to 4.3 pct

* Jan loans total 1.39 trillion yuan, 3rd highest on record

* For CPI and PPI graphic: http://link.reuters.com/dug88h

* For lending and M2 graphic:
http://link.reuters.com/hug88h

By Zhou Xin and Simon Rabinovitch

BEIJING, Feb 11 (BestGrowthStock) – Chinese consumer inflation
unexpectedly slowed last month, but a leap in lending and a
rise in factory-gate inflation will keep policymakers alert to
the risk of credit-fuelled overheating in the world’s
third-largest economy.

The dip in inflation, though likely to be temporary because
of seasonal factors, gave a boost to markets on the hope that
Chinese tightening need not be as aggressive as some had
feared. Asian stocks rose, copper prices jumped and oil
strengthened. [ID:nSGE61A02H]

The central bank has already started to tap on the monetary
brakes, notably by raising banks’ required reserves, and
economists expect further tightening steps in the months to
come. This view was all but confirmed by the central bank later
in the day, when it said in a report that it would “normalise”
monetary conditions after last year’s ultra-loose pro-growth
policies.

“The January CPI does mean that pressure on policymakers to
do something right away is not there anymore. But we expect the
February number to be close to 3 percent, certainly above 2, so
pressure for a rate hike in the second quarter is very strong,”
said Tao Wang, an economist with UBS in Beijing.

The consumer price index rose 1.5 percent in the year to
January, slowing from a 1.9 percent increase in the year to
December and undershooting forecasts of a 2.0 percent rise,.

China’s economic data at the turn of the year are tough to
read because of distortions caused by the variable timing of
the week-long Lunar New Year holiday, which fell in January
last year and February this year.

The upshot was that food prices, which make up one-third of
China’s CPI basket, increased slowly in year-on-year terms last
month but are likely to rise more strongly this month.

“The central bank will probably have to wait until seasonal
factors fade in one or two months to make further moves,” said
Jiang Chao, an analyst with Guotai Junan Securities in
Shanghai.

GRADUAL TIGHTENING

In a quarterly monetary policy report, the People’s Bank of
China was as clear as it has ever been about the path of
gradual tightening it has embarked on.

“We have to reasonably normalise monetary conditions,
returning from anti-crisis mode to an ordinary basis,” it said.
Other parts of the report — about maintaining yuan stability
and controlling inflationary expectations — were largely
repetitions of its statements over recent months.
[ID:nBJA002222]

The determination of China’s Communist Party planners to
keep a grip on the economy was evident in loan figures for
January.

Bank lending of 1.39 trillion yuan was the third-largest
monthly total on record. But, given that banks had already lent
1.1 trillion yuan by mid-January, the full-month total showed
the success of subsequent arm-twisting to slow credit growth.

“The government, with its very early action on direct
control of credit, has been able to keep overall lending below
last year’s level,” Wang said.

Banks lent a record 1.62 trillion yuan ($237.3 billion) in
January 2009 when they heeded the party’s call to pump up
credit and revive an economy that stalled in late 2008 under
the weight of the global financial crisis.

Banks went on to lend a total of 9.5 trillion yuan in 2009,
providing the fuel for GDP to expand 8.7 percent, by far the
strongest growth rate of any major economy. This year, Beijing
has set a lower new-loans target of 7.5 trillion yuan.

INFLATIONARY RUMBLINGS

One unknown for policymakers is whether manufacturers and
wholesalers will be able to pass on rising prices to consumers.

Factory-gate prices rose 4.3 percent in the year to
January, accelerating from a 1.7 percent rise in the 12 months
to December. Economists had expected a 4.2 percent increase.

There is no close link between the two inflation gauges in
China, partly because of fierce competition and also because
steady increases in productivity keep a lid on unit costs.

But some economists point to a combination of factors that
could fuel consumer inflation.

Credit growth leapt 31.7 percent last year; minimum wages
are rising in some coastal manufacturing provinces; and a
resumption of fast economic growth may reduce spare capacity.

Goldman Sachs said this week that policymakers in Beijing
would not tolerate an inflation level above 4 percent, while
the China Business News identified 3 percent as the key level.

If inflation exceeds that level or if the Federal Reserve
raises U.S. interest rates, the Chinese central bank could
respond by raising its own interest rates or further increasing
the proportion of deposits that banks must hold in reserve at
the central bank instead of lending out, the paper said on
Thursday.

The PBOC raised required reserves by half a percentage
point last month, taking them to 16 percent for big banks and
sparking a global markets sell-off on fears that China was
slamming the brakes on an economy that has been a major force
behind the global economic recovery. [ID:nTOE60B095]

Premier Wen Jiabao has said China will be paying more heed
to month-on-month changes since year-on-year comparisons are
distorted by the depressed state of the economy in early 2009.

In January alone, consumer prices rose 0.6 percent,
following a 1.0 percent rise in December.

“I don’t think the central bank will introduce blanket
aggressive tightening measures in the first half, especially
since CPI was not as high as the market expected,” said Nie
Wen, an economist at Fortune Trust Co in Shanghai.
LINKS
> What next for China’s monetary policy?
…….[ID:nTOE60S097]
> China taps brakes, hopes to avoid tough steps
[ID:nTOE60C02F]
> C.bank raises curtain on gradual tightening
..[ID:nTOE60609V]
> Interest rate hike seen months away
……….[ID:nTOE60Q02J]
($1=6.827 Yuan)

Stock Today

(Additional reporting by Aileen Wang, Farah Master, Michael
Wei and Sally Huang; Writing by Alan Wheatley; Editing by Ken
Wills and Neil Fullick)

WRAPUP 3-China CPI inflation slows but lending brisk