China's Inflation Surges to 6.5%; Trade Gap Widens

Sep 11, 2007 - China's inflation rate accelerated to a 10-year high and the trade surplus widened, adding pressure on the central bank to raise borrowing costs for the fifth time this year.

Consumer prices rose 6.5 percent in August from a year earlier after gaining 5.6 percent in July, the statistics bureau said today. The trade gap widened 33 percent to $24.97 billion, the second-highest monthly total.

Stocks fell the most in more than two months on concern the government will raise rates, curb bank lending and sell more bonds to cool the world's fastest-growing major economy. Premier Wen Jiabao is trying to stop money from record exports stoking consumer-price gains and asset bubbles.

"Inflation expectations have begun to rise and the government should do something significant," said Jim Walker, chief economist at CLSA Asia-Pacific Markets in Hong Kong. "Otherwise, the stock and property bubbles will get bigger and eventually crash."

The benchmark CSI 300 Index of shares, the world's best- performing this year, fell 4.7 percent.

China's currency, the yuan, was little changed at 7.5232 against the dollar, from yesterday's 7.5214, the strongest close since a fixed exchange rate was scrapped in July 2005.

Inflation Tops Estimate

The yield on the 10-year treasury rose 7 basis points to 4.35 percent, according to the China Interbank Market. The price of the security due June 2017 was 100.4 yuan.

Inflation topped the 5.9 percent median estimate of 24 economists surveyed by Bloomberg News, driven by food costs. The trade surplus compared with an estimate of $25.9 billion.

The central bank raised the benchmark one-year interest rate by 0.18 percentage point to a nine-year high of 7.02 percent last month. It's also sold bills and ordered lenders to set aside a larger proportion of deposits seven times this year to soak up cash.

The central bank should raise borrowing costs 0.54 percentage point, twice as much as this year's biggest increase, said CLSA's Walker.

"We currently are looking for one more 27 basis point hike this year, but clearly the pressures for more are growing," said Stephen Green, senior economist at Standard Chartered Bank Plc in Shanghai.

The world's fourth-biggest economy expanded 11.9 percent in the second quarter, the largest increase in more than 12 years, powered by overseas sales and investment.

Stocks, Property

Consumer-price gains have outpaced returns on bank deposits, encouraging households to switch money to property and stocks. The benchmark one-year deposit rate is 3.6 percent.

The CSI 300 has climbed more than 150 percent this year amid government warnings that stocks may be overvalued. It's the best performing of 89 global benchmarks tracked by Bloomberg. In July, housing prices jumped 7.5 percent in 70 major cities.

Inflation has exceeded the central bank's annual target of 3 percent for four straight months. The average rate for the first eight months was 3.9 percent. In August last year, consumer prices rose 1.3 percent.

Exports gained 22.7 percent in August from a year earlier and imports climbed 20.1 percent. The $15 billion surplus with the U.S. for the month may exacerbate friction over product safety and lawmakers' claims the yuan is kept undervalued to aid Chinese exporters.

The currency has gained 10 percent versus the dollar since the end of the peg to the U.S. currency in July 2005. China has said it will move at its own pace on foreign-exchange changes.

Paulson, Politicians

The Senate Finance Committee and the Senate Banking Committee have approved legislation aimed at pressing China to allow faster currency gains. U.S. Treasury Secretary Henry Paulson said the proposals risked triggering protectionist measures worldwide.

Larger gains would help to narrow the trade surplus, forecast by the government to rise to as much as $300 billion this year from $177.5 billion in 2006.

The government has raised export taxes and loosened controls on money leaving the country to try to avoid fueling asset bubbles and consumer-price gains.

Inflation raises the risk of social unrest as the Communist Party prepares for its 17th National Congress, a five-yearly meeting starting Oct. 15 that will decide leadership changes. Soaring consumer prices helped trigger the Tiananmen Square protests that were crushed by the army in 1989.

Pork prices have surged in the world's biggest consumer of the meat because of a pig shortage. Food accounts for a third of the consumer price index, meat alone for 7 percent.