China's Inflation Accelerates, Adding Pressure ?

BEIJING—China's economic growth slowed slightly in the first quarter, but inflation accelerated to a nearly three-year high in March, raising the likelihood that Beijing will have to take further measures to tighten policy.

The country's gross domestic product rose 9.7% from a year earlier in the first quarter, down marginally from 9.8% growth in the fourth quarter of 2010. Growth was faster than expected, as economists polled earlier by Dow Jones Newswires had a median forecast of 9.5%.

The consumer-price index, meanwhile, rose by 5.4% from a year earlier in March, up from 4.9% in February and the fastest pace since July 2008. Economists had expected a 5.3% rise.

China's leaders have said repeatedly that taming consumer prices is their top economic priority this year.

They have taken a long series of measures in that fight, including four interest-rate increases since October and government orders to companies like Anglo-Dutch consumer-goods giant Unilever PLC to delay planned price increases. But prices have continued rising rapidly.

"The GDP figure is better than expected, showing domestic demand remains solid, which provides the People's Bank of China some leeway to keep tightening monetary policy," said HSBC economist Ma Xiaoping.

China's State Council, or Cabinet, said Wednesday it will take all means necessary to maintain price stability. The government aims to keep this year's overall CPI increase under 4%.

China's producer-price index, a measure of wholesale factory prices that can be a leading indicator of inflation pressures, rose 7.3% from a year earlier in March, the data showed, higher than February's 7.2% rise but below economists' median forecast of a 7.4% increase. The Chinese economy expanded at a seasonally adjusted rate of 2.1% from the previous quarter, the statistics bureau said. This is the first time that China has released an official estimate of its quarter-on-quarter growth, which is the preferred measure of growth in most major economies.

The new statistics came on Friday, a day after China said its foreign-exchange reserves surged past $3 trillion and bank credit grew faster than expected last month, fresh signs of stubborn inflationary pressures in the world's No. 2 economy.

Financial institutions in China extended 679.4 billion yuan ($104 billion) of new yuan loans in March, according to central bank data issued Thursday. That was roughly a sixth more than the 585 billion yuan median forecast by 13 economists surveyed earlier by Dow Jones Newswires.

Huge credit growth over the past couple of years has helped fuel inflation and the government has had trouble reining it in—even though it owns all of China's major banks.

The People's Bank of China also said that the country's foreign-exchange reserves swelled by $197.4 billion in the first quarter to $3.0447 trillion. The enormous sum reflects inflows from foreign investment and speculative capital, which are adding cash into China's already speedy economy.

The big question for China and the rest of the world is whether Beijing can pull back prices—and prevent the instability that could accompany runaway inflation— without throttling back so hard that growth stalls in the main driver of the global economy. Many economists expect at least one more interest-rate increase this year, and further efforts to cool bank lending.

The lending and money numbers "are higher than our expectation, so the central government will probably continue with monetary tightening in the next few months," said Citic Securities economist Sun Wencun.

The nearly $200 billion jump in currency reserves during the quarter was somewhat puzzling, since China had a small trade deficit in the first period— meaning that net exports, usually a big source of new reserves, didn't play a role this time. China accumulates the reserves because the central bank must buy dollars and other currency that come into the economy, issuing yuan in return. China's currency isn't freely convertible. The central bank invests most of the reserves in U.S. Treasurys and other foreign government debt.

Posted in: Bisnis