Chinese inflation slows in January


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.

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.

"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 per cent, 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 per cent in the year to January, slowing from a 1.9 per cent increase in the year to December and undershooting forecasts of a 2.0 per cent rise, data from the National Bureau of Statistics showed.

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. We think there will be further tightening when CPI rises above 2.25 per cent, probably after March," said Jiang Chao, an analyst with Guotai Junan Securities in Shanghai, referring to the current bank deposit rate.

Once inflation surpasses that level, real rates will be negative, potentially driving savers to pour money into stocks and property at a time when the government is already concerned about bubbles forming in these markets.

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 and surpassed forecasts of 1.35 trillion yuan. 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 the pace of credit growth.

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 per cent, 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.

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 per cent in the year to January, accelerating from a 1.7 per cent rise in the 12 months to December. Economists had expected a 4.2 per cent 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 per cent last year; minimum wages are rising in some coastal manufacturing provinces; and a resumption of fast economic growth may reduce spare capacity.