Chinese consumer inflation spurted to a 16-month high in February and a raft of economic data displayed broad-based strength, providing fresh arguments for policy tightening sooner rather than later.
The pace of credit growth halved in February, as expected, but some economists said the central bank would probably not wait long before increasing banks' required reserves for a third time this year and perhaps even raising borrowing costs.
"We believe more decisive policy tightening measures than those that have been implemented so far ... are needed to prevent the economy from overheating," Goldman Sachs economists Yu Song and Helen Qiao said in a note to clients.
Asian stocks fell more than 0.4 per cent as investors priced in a tough policy response, while the main Shanghai stock index surrendered early gains of about 0.6 per cent to stand 0.3 per cent lower in late morning trade.
Consumer price inflation quickened to 2.7 per cent in the year to February from 1.5 per cent in the year to January, handily beating forecasts of 2.3 per cent.
Tao Wang, China economist for UBS in Beijing, said the increase largely reflected a low base of comparison in February 2009, when the economy was at its nadir.
"It will, though, give the market an expectation of a more imminent rate hike. Our forecast is that a rate hike should happen relatively soon, if not this month then probably early in the second quarter," she said.
Inflation now exceeds the 2.25 per cent interest rate on 12-month certificates of deposit, raising the risk for policymakers that savers withdraw their cash from banks and plunge into the already bubbly property market.
Pipeline price pressures are also building. Annual factory-gate inflation quickened to 5.4 per cent in February from 4.3 per cent in January. Economists had forecast 5.2 per cent.
Factory output beat expectations, expanding 20.7 per cent in January and February from year-earlier levels, while retail sales growth of 17.9 per cent was just a touch lower than forecast. Both readings marked an acceleration from December.
Only urban investment in fixed assets such as roads and factories slowed from a year earlier, when the government was frantically rolling out its 4 trillion yuan (€430 billion) economic stimulus package.
But investment growth of 26.6 per cent in January and February still beat market forecasts of 26.0 per cent.
The National Bureau of Statistics, which released the data, produces a combined figure for the first two months to iron out distortions introduced by the variable timing of the Lunar New Year, which fell in February this year but in January in 2009.
Economists tied the underlying strength of the economy to the government's continuing pump-priming, recovering global growth - export data for February released on Wednesday were surprisingly strong - and the ready availability of cheap credit.
Although loan growth slowed to 700 billion yuan in February from 1.39 trillion in January, banks have already disbursed 28 per cent of the full-year quota of 7.5 trillion set by the government. And the proceeds of a lot of last year's lending is still on deposit with banks, ready for companies to spend.
Yet not all economists believe major monetary tightening is imminent as policymakers are wary of the fragility of the global recovery. Moreover, they judge inflationary pressures have been exaggerated by the Lunar New Year holidays.
"We still think that the rate hike will be in the second half this year, not in the first half," said Ting Lu, an economist with Bank of America Merrill Lynch.
Reuters