China's Inflation Tops 5%, Adding Pressure for Wen to Raise Interest Rates

China’s inflation accelerated to the fastest pace in 28 months in November, underscoring the case for Premier Wen Jiabao to raise interest rates again.

Consumer prices rose 5.1 percent from a year earlier, driven by food costs, a statistics bureau report showed in Beijing today. That was more than the 4.7 percent median forecast in a Bloomberg News survey of 29 economists. In October, inflation was 4.4 percent.

The strength of consumer-price gains and capital flows into the world’s fastest-growing major economy may require the central bank to add to October’s increase in benchmark rates, the first since 2007. Officials yesterday raised reserve requirements for banks for the third time in five weeks to drain money from the financial system.

“The case for a rate hike now to help manage inflation expectations is indisputable,” Wang Tao, a Beijing-based economist at UBS AG, said before today’s release.

China, which overtook Japan as the world’s second-largest economy in the second and third quarters, lags behind Asian countries including Malaysia and South Korea in boosting borrowing costs.

The nation’s industrial-output growth accelerated to 13.3 percent last month from a year earlier, today’s report showed. That exceeded economists’ median estimate of 13 percent.

Retail Sales Jump

Retail sales gained 18.7 percent. Urban fixed-asset investment rose 24.9 percent in the first 11 months of 2010 from a year earlier, topping analysts’ median estimate of a 24.3 percent gain.

Producer prices rose 6.1 percent in November from a year earlier, exceeding analysts’ median forecast of 5.1 percent, the statistics bureau report showed. Costs of raw-materials such as cement, steel, fuel and cotton have surged, a survey of purchasing managers indicated on Dec. 1.

London-based Capital Economics Ltd. said yesterday that a rate increase after senior officials conclude an economic policy meeting in Beijing this weekend “cannot be ruled out.” The Politburo has already announced that the nation will officially switch next year to a tighter, “prudent” monetary stance.

The benchmark one-year deposit rate stands at 2.5 percent, less than the pace of inflation, and the lending rate is 5.56 percent. The Shanghai Composite Index of stocks has fallen 10 percent from a Nov. 8 high, extending this year’s loss to 13 percent, on concern tighter monetary policy will cut economic growth and profits.

‘Big Guns’

“Inflation is shaping up to be the primary challenge facing policy makers in coming months, and it makes sense for them to bring out the big guns,” Brian Jackson, a Hong Kong- based analyst at Royal Bank of Canada, said before today’s data. Tools may include a faster pace of yuan appreciation, as well as higher rates by year-end, he said.

The central bank yesterday announced a 50 basis point increase in reserve ratios, effective Dec. 20. That move may lock up about 350 billion yuan （$53 billion）, according to Barclays Capital Asia Ltd. Besides monetary policy, Wen is using administrative tools, such as sales of state food reserves, to cool prices.

Signs of inflationary pressure have included McDonald’s Corp., the world’s biggest restaurant chain, pushing up prices, citing rising costs. The southwestern Chinese city of Kunming has imposed temporary price ceilings on “daily necessities,” telling retailers such as Wal-Mart Stores Inc. and Carrefour SA to report any planned price rises.

Cash Flowing In

Cash flowing into the economy from trade, foreign direct investment and bets on gains by the yuan has added to a boom in domestic bank lending in exacerbating inflation risks. China’s trade surplus in November was $22.9 billion and, in addition, banks extended a more-than-estimated 564 billion yuan of local- currency loans.

Broad money supply, or M2, rose last month by 19.5 percent, the fastest gain in six months, the People’s Bank of China reported yesterday. M2 has surged 55 percent over the past two years and outstanding yuan-denominated loans have climbed to 47.4 trillion yuan, 60 percent more than in November 2008.

Officials are seeking slower credit growth and economists, including at Societe General SA, expect the government to set a lower loan ceiling for 2011 than this year’s target of 7.5 trillion yuan.

Inflation may have peaked in November and will probably soften this month as “price intervention” takes effect and the impact of earlier price increases washes out of year-on-year comparisons, Wang Qing, a Hong Kong-based economist at Morgan Stanley, said in Dec. 6 note.

--Li Yanping.