Chinese inflation rise fuels interest rate fears

Investors offload their shares as inflation in China soars to an 11-year high on a surge in the country's food prices.

Inflation in China has reached an 11-year high on increasing food prices, raising the possibility of another interest rate rise.

Consumer price inflation rose from 5.6 per cent in July to 6.5 per cent in August, driven by an 18.2 per cent leap in the cost of food, which accounts for one third of the consumer price basket.

The National Bureau of Statistics said that meat prices alone rose 49 per cent, driven mainly by increases in the cost of pork — China’s staple meat — because of a shortage of pigs and higher feed costs.

The Shanghai Composite Index plunged by 241.32 points, or 4.51 per cent, to 5,113.97 as investors digested the prospect of rising borrowing costs.

Across other markets, the Hang Seng in Hong Kong fell by 207.96 points to 23,791.74, but in Japan, the Nikkei recovered some ground, rising 112.70 points to close at 15,8177.76 after the previous session's 350-point drop on a surprise 1.2 per cent decline in GDP.

The ruling Communist Party in China is sensitive to any rise in inflation that could foment civil unrest.

A senior party researcher gave warning this week that inflation becomes difficult to control when it exceeds 5 per cent.

Authorities in Beijing have told schools and colleges in the capital not to raise food prices in canteens as inflation climbs, and couples in Shanghai are bringing forward their wedding dates to try to beat rising prices.

However, costs of other goods have remained stable, with prices of non-food consumer items rising by only 0.9 per cent.

Economists say there is no sign yet that the food price increase is spilling into other areas of the economy.

Rob Subbaraman, the chief Asia economist for Lehman Brothers in Hong Kong said: “The risk is that if the economy continues to grow very rapidly, this inflation, which looks concentrated in food, starts spreading and influencing inflationary expectations.”

The central bank has raised rates four times this year, and many observers expect China to raise interest rates again.

Goldman Sachs said: “Going forward we believe there are nontrivial risks that inflation may continue to edge up.

"We expect the central bank to respond to higher inflationary pressures with decisive tightening measures, including two interest rate hikes to the benchmark lending and deposit rates by the end of this year."

(Published by Times Online, September 11, 2007)


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