China inflation rises higher than expected

Inflation in China was higher than expected in July, despite a series of efforts by the government to rein in prices.

Consumer prices in July rose 6.5% compared with the same month last year, the National Bureau of Statistics said.

The rise comes even as China’s central bank has raised interest rates five times since October 2010 in a bid to control prices.

Rising consumer prices have become a hot political issue in China.

“There is no doubt inflation is not getting better, given the month-on-month numbers,” said Wei Yao of Societe Generale.

Inflation vs growth

Chinese authorities have said that controlling price rises is their top priority.

Not only have they raised the cost of borrowing, they have also tried to curb lending in the country by raising the amount of cash banks must hold in their reserves several times in the past 12 months.

However analysts say the current of the global economy may put the authorities in a difficult position.

The figures come amid growing concerns about a slowdown in the global economy with a faltering US recovery and growing debt issues in Europe.

Analysts have warned that a slowdown in the US and Europe may hurt growth in export-dependent countries such as China.

They said authorities will have to strike a fine balance between trying to rein in prices and ensuring that tight monetary policies do not start to hurt growth.

“This is the type of data that should have prompted the People’s Bank of China to hike interest rates, but given the current turmoil in financial markets, we expect them to delay it,” Societe General’s Wei Yao added.

Dong Xian’an of Peking First Advisory said while China has been tightening its monetary policy in the past year to control price rises, authorities must be mindful that they may need to change their stand.

“China must be on serious watch for policy overtightening under the current global circumstances.”

Domestic demand

China’s economic growth in recent times has been powered by the success of its export sector.

However, there have been calls from economists as well as its trading partners that Beijing needs to rebalance its economy and boost domestic demand in order to sustain its growth.

Analysts said that given the current situation in the US and Europe, China needs to act fast.

“It’s time for the Chinese government to relax its policies,” said Tang Yunfei of Founder Securities.

“It’s time for Beijing to announce to the whole world that it will try to stimulate domestic demand again,” he added.

China needs to ease its monetary policies in order to boost consumption in the country, say analysts.

Mr Tang warned the longer the authorities delay, the more it will hurt China’s economy.

Source: BBC