China Requires Banks to Set Aside Bigger Reserves

Oct 13, 2007 - China ordered banks to set aside more money as reserves for the eighth time this year to cool speculation in stocks and real estate and curb the fastest inflation in 10 years.

Lenders must park 13 percent of deposits as reserves from Oct. 25, up from 12.5 percent, the People's Bank of China said today on its Web site. The required ratio is the highest in almost a decade.

Seven increases in the reserve requirement and five interest-rate rises this year probably failed to stop the economy expanding faster than 11 percent for a third quarter, a government report may show next week. Surging exports have pumped money into the world's fastest-growing major economy, fanning inflation and fueling a boom in shares and real estate.

"They're clearly concerned primarily about inflation, because it did get out of hand over the summer," said Dariusz Kowalczyk, chief investment strategist at CFC Seymour Ltd. in Hong Kong. Inflation 'creates asset bubbles because when inflation is high then it doesn't seem meaningful for people to save money -- they would rather invest in real estate or the stock market.'

China's consumer prices surged 6.5 percent in August from a year earlier, the biggest jump since December 1996. The rate breached the government's annual 3 percent target for a fourth consecutive month, as food costs soared. Inflation was a factor in protests that led to the Tiananmen Square crackdown in 1989.

China's trade surplus jumped 56 percent in September, the customs bureau said yesterday, taking it to $185.65 billion for the first nine months of the year, more than the $177.5 billion for all of last year.

Money Supply

Money supply is surging because the government wants to hold down the yuan, forcing the central bank to sell the currency and pump cash into the banking system. Some of that money is finding its way into stocks, pushing the benchmark CSI 300 Index up 181 percent this year. Money supply rose 18.5 percent in September.

The economy, the world's fourth largest, probably grew 11.5 percent in the third quarter, the government may announce next week, according to the median estimate of 14 economists surveyed by Bloomberg News. The date for the release of the gross domestic product report hasn't been set.

Of 20,000 households surveyed in a central bank quarterly report released Sept. 20, a record 61.3 percent said they expect inflation to quicken in the fourth quarter.

Inflation Expectations

"Inflation is a priority for policy makers because in China, it is not just an economic problem, but also a political risk," said Chris Leung, senior economist at DBS Bank Ltd. in Hong Kong. "The Chinese government wants a `harmonious society,' but how can you have one with prices going up?"

Inflation is raising the risk of social unrest as the ruling Communist Party prepares for its 17th National Congress, a five-yearly meeting starting Oct. 15 that will decide leadership changes.

China has taken other action to combat rising prices.

All government-regulated prices have been frozen until the end of the year, and the state has boosted the supply of grains, vegetables and pigs and cracked down on illegal collusive price increases. The central bank has sold bills to soak up cash from the financial system.

Household Savings

Stock and house prices have gained as households shifted money from low-yielding bank deposits. Household savings fell 41.8 billion yuan in August from the previous month. Housing prices jumped 20.8 percent in Shenzhen and 12.1 percent in Beijing in August.

China has resisted calls from the U.S. and Europe to let its currency strengthen at a faster pace, which would make imports less expensive and ease pressure on domestic prices as well as helping to curb the widening trade surplus.

The yuan has gained about 10 percent to 7.51 versus the dollar since the end of a fixed exchange rate in July 2005.

"Unless the Chinese allow the exchange rate to go up, I'm worried about the stability of the economic system," former Federal Reserve Chairman Alan Greenspan said in a speech in London on Oct. 2. "The exchange rate will create more economic problems than they know."

The government will be forced into further reserve ratio increases soon, according to Kowalczyk of CFC Seymour Ltd.

"The impact will be negligible," he said. "When you look at how much in yuan terms is taken away from the money market, it's not enough to neutralize the impact of maintaining the exchange rate."

China Trade Surplus Jumps 56 Percent to $23.9 Billion

Oct 12, 2007 - China's trade surplus jumped 56 percent in September to $23.9 billion, adding pressure on the central bank to increase borrowing costs and let the yuan strengthen faster to prevent the economy overheating.

The gap widened from $15.3 billion a year earlier, the customs bureau said on its Web site today, after gaining 33 percent in August. That exceeded the $21.6 billion median estimate of 20 economists surveyed by Bloomberg News.

Export earnings helped push China's foreign-exchange reserves to a record $1.43 trillion at the end of September, a separate report showed. Chinese stocks dropped on speculation the central bank is poised to raise rates for a sixth time this year as cash from overseas sales fuels inflation running at a 10-year high.

"All the money flooding in is a phenomenal problem for policy makers," said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. "The government may raise rates, but accelerating the pace of yuan appreciation or raising bank reserve requirements are more efficient tools."

The yuan has gained about 10 percent versus the dollar since the end of a fixed exchange rate in July 2005. The currency traded at 7.5080 at 3 p.m. in Shanghai after closing yesterday at 7.5057.

The CSI 300 Index of stocks fell 0.4 percent, after earlier plunging as much as 4.8 percent. It has almost quadrupled in the past year. Inflation reached an annual rate of 6.5 percent in August on food costs and the September figure may be announced as soon as next week.

Borrowing Costs

"Rates are likely to rise again because of the higher inflation rate," said Yao Maogong, head trader at Shanghai Securities Co. in the city.

The one-year lending rate increased to 7.29 percent last month and the central bank told lenders to set aside larger reserves for the seventh time this year.

Speculation an increase is likely comes ahead of the ruling Communist Party's five-yearly congress next week. Central banker Zhou Xiaochuan, who oversaw the revaluation of the yuan and raised borrowing costs for the first time in nine years in 2004, is likely to be moved to a new post after a five-year term, economists predict.

The trade surplus for the first nine months jumped 69 percent to $185.65 billion, topping the $177.5 billion record for all of last year.

M2, the broadest measure of money supply, increased by 18.5 percent in September, according to a report released today -- the eighth straight month that it has exceeded the central bank's 16 percent annual target.

`Anti-China Sentiment'

European finance ministers this week urged China to let the yuan appreciate more quickly against their currency to make its exports more expensive and narrow the gap. Recalls of Chinese- made products such as lead-painted toys have exacerbated trade tensions this year.

"Anti-China sentiment is only going to get worse," said Tim Condon, head of Asia research at ING Groep NV in Singapore, citing U.S. politicians' calls for protectionist legislation in the run-up to next year's presidential election.

Exports rose 22.8 percent in September from a year earlier to $112.48 billion and imports had the smallest gain in three months, climbing 16.1 percent to $88.57 billion.

"Imports are becoming weaker because they are being replaced by domestic production," said Sun Mingchun, an economist at Lehman Brothers Holdings Inc in Hong Kong. "The government should lower tariffs and boost domestic consumption to encourage more imports and the pace of yuan appreciation needs to accelerate too."

Bush: No `Trade War'

U.S. Treasury Undersecretary David McCormick last month said the yuan needs to strengthen faster to boost Chinese consumption and rebalance the world's fourth-largest economy. In the U.S., the Senate Finance Committee in July approved legislation aimed at pressuring China and other countries to allow their currencies to trade more freely.

President George W. Bush said he won't approve any laws that will 'start a trade war or spark protectionist policies,' the Wall Street Journal reported on its Web site today.

Exports to the U.S. rose 15.8 percent in the first nine months from a year earlier and those to Europe jumped 30.8 percent. Shipments to India soared 67.5 percent, the customs bureau said.

Growth in the surplus has slowed from June's 87 percent increase from a year earlier on cuts to export rebates.

The government is concerned that the growth in money supply is helping to fuel increases in property prices. In August, housing prices jumped 20.8 percent in Shenzhen and 12.1 percent in Beijing from a year earlier.

China has the world's fastest-growing major economy. It expanded 11.9 percent in the second quarter from a year earlier, the fastest pace in more than 12 years, on exports and investment.

China Raises Rates for Fifth Time to Cool Economy

Sep 14, 2007 - China raised interest rates for the fifth time since March to curb the fastest inflation since 1996 and damp speculation in stocks and real estate.

The benchmark one-year lending rate will increase to a nine-year high of 7.29 percent from 7.02 percent, starting tomorrow, the central bank said today on its Web site. The rate has risen from 6.12 percent on March 17.

China is flooded with cash from a trade surplus that reached a record $161.8 billion in the first eight months of this year, pushing up consumer prices at twice the central bank's target pace and raising the risk of asset bubbles. Premier Wen Jiabao is trying to cool the world's fastest-growing major economy without triggering a sudden slowdown that may cost jobs and leave factories idle.

"The government's biggest concern is inflation," said San Feng, an economist with the State Information Center in Beijing. "It means that people get negative returns on bank deposits, and that's fueling investment and bubbles in the stock and property markets."

The central bank said it wants to strengthen monetary and credit controls, guide investment growth and stabilize inflation expectations. The one-year deposit rate will rise to 3.87 percent from 3.6 percent.

Rates are likely to rise once more this year, said Dariusz Kowalczyk, chief investment strategist at CFC Seymour Ltd., Glenn Maguire, chief Asia economist at Societe Generale SA, and Jing Ulrich, chairman of China equities at JPMorgan Chase & Co.

The previous increase was less than a month ago.

Credit Squeeze

China's action contrasts with efforts by central banks around the world to boost liquidity because of a credit squeeze linked to soured home loans in the U.S. The European Central Bank and Bank of Japan delayed planned interest-rate increases, and economists expect the Federal Reserve to cut borrowing costs next week.

Contagion from the highest delinquency rate on U.S. mortgages in five years has triggered a slump in demand for asset-backed securities and driven up borrowing costs for banks. Northern Rock Plc said today it is receiving emergency funding from the Bank of England in the biggest bailout of a British lender in 30 years, because it was unable to finance itself in money markets.

'Out of Control'

China wants 'to prevent inflation expectations from getting out of control' and stem inflows into an overheated equity market, said Julian Jessop, an economist at Capital Economics Ltd. in London. Stocks 'might wobble on this announcement, but the wider economic impact should be negligible.'

The benchmark CSI 300 Index has quadrupled in the past 12 months. House prices in 70 major cities rose 8.2 percent in August from a year earlier.

The world's fourth-biggest economy expanded 11.9 percent in the second quarter from a year earlier and is forecast by the International Monetary Fund to be the biggest contributor to global growth this year.

Soaring food costs pushed inflation to 6.5 percent in August, more than double the 3 percent annual target of the People's Bank of China.

Rising consumer prices make it harder for the government to curb asset bubbles. Households invest in shares and property instead of letting inflation erode the value of bank deposits. The government reduced a tax on interest income to 5 percent from 20 percent last month to make savings more attractive.

Quicker Yuan Gains

The pace of yuan appreciation may quicken as the government tackles high inflation and growth in the money supply, said Craig Chan, a Singapore-based currency strategist at Lehman Brothers Asia Ltd. That would make exports more expensive and help to slow the flow of cash into the economy.

"This is an opportunity to trade and go long on the yuan, not just against the dollar, but against other currencies," said Chan. The currency 'could overshoot' Lehman's year-end forecast of 7.45 per dollar. The yuan closed today at 7.5160.

The currency has gained about 10 percent against the dollar since the end of a fixed exchange rate in July 2005, though the central bank limits daily fluctuations.

Money supply grew 18.1 percent in August, exceeding the central bank's annual target of 16 percent for the seventh straight month. Urban fixed-asset investment climbed 26.7 percent in the first eight months of this year.

Government Efforts

Besides raising rates, the People's Bank of China has ordered lenders to set aside larger reserves of money on seven occasions this year. Some economists expect at least one more increase in reserve requirements this year.

The central bank also sells bills to soak up cash. The government sold 600 billion yuan ($80 billion) of bonds last month as part of setting up an investment agency for the nation's foreign-exchange reserves.

China has eased capital controls to let more money flow out of the economy. The central bank raised interest rates twice in 2006 and increased lenders' reserve ratios on three occasions.

Government efforts to rein in the trade surplus may be having an effect. While the surplus last month widened 33 percent from a year earlier to $24.97 billion, overseas shipments had their smallest gain in five months and output growth slowed for a second month after a rise in export taxes.

China's Trade Surplus Widens to $24.9 bn In August

Sep 11, 2007 - China's trade surplus rose 33.0% to US$24.9 billion in August from last year, marking the second highest monthly increase, official data indicated Tuesday.

The monthly trade surplus registered its record high of US$26.9 billion in June and fell slightly to US$24.4 billion in July.

For the first eight months, China's total trade surplus grossed US$161.8 billion, the report said. At the current rate, the surplus is set to cross US$250 billion in 2007, breaching the record high ofUS$177.47 billion posted last year, analysts say.

Exports rose 22.7% to US$111.3 billion in August from last year, while imports advanced 20.1% to US$86.4 billion, the report said.

Europe was China's biggest trading partner, with exports to Europe rising 31.3% to US$23 billion, while imports were up 21.8% at US$10.2 billion.

The strong export growth continued amid growing criticism particularly from the US that China's undervalued yuan gives the country an unfair trade advantage over its trade partners.

China had a trade surplus of US$15 billion with the United States, its second-biggest trading partner. Exports to the United States rose 16.7% to US$20.9 billion, while imports from the US were up 15.5% at US$5.9 billion. China's total trade surplus with the United States stood at US$103.3 billion for the first eight months.

The U.S. Senate is reportedly considering measures to penalize China for its currency controls. The measures have moved ahead despite protests by U.S. Treasury Secretary Henry Paulson, who is conducting a long-range strategic economic dialogue with Beijing over trade and related disputes.

Meanwhile, China has initiated several measures in recent months, to curtail the overrun export momentum and ease frictions with China's trade partners. Companies have been encouraged to curb exports of products that consume vast amounts of energy and cause serious pollution and expand imports of high-tech goods. Government imposed additional export tariffs for exports and lowered import duties from June this year in a move to limit the widening trade gap.

China's trade surplus expanded to US$112.5 billion, in the first half year, up US$51.1 billion from last year, as exports grew 27.6% to US$546.7 billion, and imports advanced 18.2% to US$434.2 billion. The overall external trade showed an increase of 23.3% over a year ago.

The central bank said in its second quarter monetary policy report released on September 6, that the low resource prices and labor costs are among the major factors that boosted trade surplus.

The report said that trade surplus would remain at a relatively high level going forward. The bank noted that the growth of the world economy is likely to be above 4.0% for the fifth consecutive year, making this expansionary cycle the longest in the past 30 years, triggering strong external demands.

Meanwhile, restrictions on exports of high-tech equipment to China by trading partners will continue to limit China's efforts to expand imports, the report added.

The booming external trade helped the economy expand 11.9% in the second quarter and 11.5% in the first half year, bringing excess liquidity in the financial system that put further inflationary pressure.

Consumer inflation in China soared to its highest level in nearly 11 years in August as food prices continue to surge, the National Bureau of Statistics said Tuesday. The annual Consumer Price Index -CPI, rose 6.5% in August after climbing 5.6% in the previous month. The result exceeded 6.0% growth expected for August.

The increasing inflationary concerns intensified expectations of further rate hikes although the central bank raised the key interest rates four times this year.

Last month, the People's Bank of China raised the benchmark one-year interest rate to a nine-year high of 7.02%. The central bank also announced its decision last week to raise the reserve requirement ratio for commercial banks by 0.5 percentage point to 12.5% effective from September 25, in a bid to control excessive bank lending.

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.

China raises bank reserve requirements to slow credit growth

Sep 6, 2007 - China's central bank said it will raise the reserve requirement on bank deposits by 0.5 percentage points in a move to control rapidly expanding bank credit and money supply.

The People's Bank of China said in a brief statement on its website that the increase takes effect on September 25.

It is the seventh increase this year, bringing the reserve ratio to 12.5 pct for most banks.

China has been struggling to control a rapid expansion in bank lending, which it fears is fuelling investment and adding to inflationary pressure.

The central bank has already raised interest rates four times this year in an effort to check an expansion in bank credits. But outstanding loans were up 16.6 pct year-on-year as of the end of July, while the broad M2 money supply was up 18.5 pct.

In July, China's consumer price index rose 5.6 pct year-on-year, its highest monthly rate in over a decade, with senior government officials predicting August figures to be even higher.

The central bank has also been forced to soak up or sterilize funds entering the banking system as the nation builds up a growing trade surplus. China had a trade surplus of 136.82 bln usd in the first seven months of the year.

Analysts noted that the People's Bank of China needs to respond to maturing short term paper that it had previously issued to soak up liquidity in the banking system.

"The People's Bank of China is forced to hike reserve ratios because of 837 bln yuan in (central bank) paper maturing in the next two months," said Logan Wright, analyst at Stone & McCarthy Associates, a research firm affiliated with XFN-Asia.

Wright estimates the central bank's latest move will freeze 185 to 190 bln yuan within the banking system.

(1 usd = 7.6 yuan)

China's factories slow the tempo in July

Aug 15, 2007 - China's industrial output slowed more than expected in July after tax changes made exports less attractive, suggesting to some economists that the country's politically sensitive trade surplus may shrink in coming months.

The output growth of 18 percent, which came a day after a strong rise in retail sales, could point to softness in fixed-asset investment when monthly figures are released on Thursday, some economists said.

"With external demand and private consumption proving resilient, the modest easing in industrial production momentum could be due to some moderation in domestic investment growth in July," said Qian Wang with JPMorgan Chase in Hong Kong.

Economists said the slower pace of output did not change the broader policy picture. Many expect the central bank, which has raised interest rates three times so far in 2007, to do so again this quarter to rein in inflation, which has jumped to a 10-year high of 5.6 percent because of runaway food prices.

However, policy makers will also be aware of the shadows cast over the world economy by the fallout from the crisis in the U.S. subprime mortgage market. Another worry is the booming China stock market, which keeps defying gravity.

Indeed, economists said unsettled global market conditions could explain why the central bank in recent weeks has halted the yuan's steady climb, making the currency more or less mark time.

EXPECT EXPORTS TO FALL

Factories churned out 18.0 percent more goods than in July 2006, down from 19.4 percent growth in June, the National Bureau of Statistics said on Wednesday.

Economists had expected a rise of 19.2 percent.

"The surprising slowdown in industrial output was partly caused by the reduction in export tax rebates," said Zhao Qingming, an economist with China Construction Bank in Beijing.

China scrapped or cut tax rebates, effective on July 1, on nearly 3,000 export lines, including metals and textiles, to help reduce its record trade surplus and discourage companies from making low-value, energy-intensive goods.

In fact, export growth accelerated in July, but economists said this was due to companies shipping goods that had been ordered before the tax changes were announced.

But with China's official survey of manufacturers showing declines in overseas orders and industrial output for three months in a row, many economists believe exports will lose steam over the rest of 2007.

"As manufacturers expect export growth to decline, they are now cutting their production a month ahead of time," said Gene Ma, chief economist with China Economic Business Monitor, an independent research house in Beijing.

Yet another safety scandal concerning Chinese goods -- this time the recall of millions of toys by Mattel Inc because of small magnets that could be swallowed and cause injury -- may also hurt demand for made-in-China goods.

GLOBAL UNCERTAINTY

Ma, with China Economic Business Monitor, said China would be hit by widening credit market strains if they sap U.S. economic growth and thus reduce demand for Chinese goods. Mingchun Sun at Lehman Brothers in Hong Kong agreed.

"Given the turmoil in global financial markets and uncertainty in the global economic outlook, Chinese exports may be facing tougher times in the future," he said.

"Because of the comparative advantage of Chinese exports, the export growth won't slow down too much, but it should go back to around 20 percent instead of 30 percent," Sun said.

Rainstorms across much of China that triggered floods, landslides and other disasters probably contributed to the dip in output in July, economists said.

Ma said Beijing's campaign for a greener economy might also be having an effect, noting slower growth in output of power, cement, steel and iron.

Still, economists said the slower tempo was not dramatic and had to be seen in context: in the first seven months of the year, factory output was still up 18.5 percent from the same period last year. By contrast, India's factories in June produced 9.8 percent more goods than a year earlier.

For the first time, China, the fastest-growing of the major economies, has contributed more than the United States to global growth so far this year, according to the International Monetary Fund.

China's wholesale inflation rate dips in July

Aug 10, 2007 - China's wholesale inflation rate unexpectedly slowed in July, showing cost pressures at the factory gate remain in check despite a food-related surge in consumer prices.

Annual producer price inflation slowed to 2.4 percent in July from 2.5 percent in June, the National Bureau of Statistics said on Friday. Economists had expected a rate of 2.6 percent.

Whereas food accounts for about a third of the consumer price basket, it makes up only about 10 percent of the producer price index, economists said.

"It has a higher weighting towards industrial goods. So it better underscores the fact that inflation pressures are mainly related to food rather than industrial goods," said Ben Simpfendorfer, an economist with Royal Bank of Scotland in Hong Kong.

The benign report lends support to the argument that, although the Chinese economy has been growing at a double-digit pace for five years, competitive pressures and productivity gains are keeping a lid on broad inflationary pressures.

"It's a figure that should give investors less reason to panic when we get a high-side CPI on Monday," he added.

Economists polled by Reuters expect consumer price inflation to accelerate to 4.9 percent in July from 4.4 percent in June.

Simpfendorfer expects a rise of more than 5 percent and there are rumours in financial markets that it could be as high as 5.6 percent, the highest in a decade.

"I don't know if that would provoke a monetary policy response but I do think the PBOC will worry about inflationary expectations and the potential impact on wage costs," he said.

A state think-tank said on Friday that even a rise in the consumer price index of 5 percent was unlikely to spell serious inflationary trouble for the economy.

"China's current economic growth can withstand CPI growth between 3 and 5 percent," the State Information Centre said.

SHAPING EXPECTATIONS

The think-tank said consumer prices were likely to rise 4.3 percent on average over the third quarter compared with increases of 4.4 percent in June and 3.2 percent in the first six months.

The People's Bank of China, the central bank, has raised interest rates three times and banks' required reserves six times so far this year to mop up excess liquidity and prevent the world's fastest-growing major economy from overheating.

The bank said on Wednesday in its latest monetary policy report that it would keep leaning to a tighter policy to rein in prices and curb inflationary expectations.

Xue Hua, an analyst at China Merchants Securities in Shenzhen, said the drop in wholesale inflation in July reflected a high base of comparison in 2006.

He calculated that, from month to month, producer price inflation is still quickening -- to 2.75 percent in July, at an annualised rate, from 2.6 percent in June.

"PPI is still on the rise," Xue said. "I think monthly PPI growth will continue to pick up in August before declining in September or October."

A breakdown of the figures shows foodstuffs in July cost 7.8 percent more at the wholesale level than a year earlier, compared with a 6.7 percent increase in the year to June.

Prices for steel products, ferrous metals and coal also rose more quickly, but there were outright falls in the cost of crude oil, gasoline and consumer durables, the statistics office said.

China's July trade surplus close to record high

Aug 10, 2007 - China on Friday reported its second-biggest monthly trade surplus on record, handing more ammunition to critics who say Beijing gains an unfair trade advantage by keeping the yuan undervalued.

The surplus in July was $24.36 billion, down from June's record high of $26.91 billion, but above forecasts of $22.5 billion and dwarfing the July 2006 figure of $14.6 billion.

Economists had expected export growth to taper off after factories rushed to ship goods in June before rebates of value added tax were cut or scrapped on July 1 on 2,800 export lines.

But annual export growth in fact accelerated to 34.2 percent from 27.1 percent in June despite a string of recalls of Chinese products around the world, notably the United States, due to safety concerns involving everything from toys to toothpaste.

"It shows Chinese exporters are still scrambling to export despite government tightening," said Li Yushi, vice-director of a Ministry of Commerce think tank.

"Many exporters are privately run, and they have no intention to slow down their businesses," Li said.

Legislation is wending its way through the U.S. Congress that would impose duties on goods imported from countries like China deemed to have fundamentally misaligned exchange rates.

But Li said he doubted that trying to raise barriers to Chinese goods would make much of a difference.

"Demand for China-made products in overseas markets is still strong despite headline-grabbing anti-dumping cases and the like. I don't think there will be any massive boycott of Chinese products," he said.

INFLATION WORRIES

Li Huiyong, chief economist at Shenyin & Wanguo Securities in Shanghai, noted that exports usually gain momentum in the second half as factories gear up to meet Christmas demand.

The trade surplus in the first seven months rose 81 percent from the same period of 2006 to $136.8 billion, and Li said it could well reach $300 billion for the whole year.

The surplus in 2006 was $177.5 billion, easily a record.

"The surplus is still high and doesn't seem to have been affected much by the yuan's appreciation and cuts in export tax rebates," Li said.

The yuan has risen 7 percent since it was revalued by 2.1 percent against the dollar in July 2005 and untethered from a dollar peg to float within managed bands.

Annual import growth also outstripped expectations, accelerating to 26.9 percent in July from 14.2 percent in June.

Crude oil imports rose 39 percent, but Li with the Commerce Ministry said strength in imports also reflected robust domestic investment.

That would be a worry to policy makers, who are striving to prevent a resurgence of capital spending out of fear that the economy is already at risk of overheating.

Companies have strong incentives to invest. Global and domestic demand is strong, profits are rising fast and banks are awash in cheap money generated by the trade surplus.

Annual growth in the broad M2 measure of money supply spurted in July to 18.5 percent from 17.1 percent in June, the People's Bank of China said on Friday. The central bank is trying to cap M2 growth this year at 16 percent.

With the economy firing on all cylinders and money growth accelerating, the central bank is likely to tighten monetary policy further in coming months to nip inflation in the bud.

"Pressure on the central bank to tighten increases significantly with such a high growth rate in M2," said Li Mingliang, an economist with Haitong Securities in Shanghai.

INFLATION COMFORT

Li predicted another one or two interest rate increases by the end of 2007. The central bank has already jacked up borrowing costs three times this year.

Economists expect data on Monday to show that consumer price inflation rose to 4.9 percent in July from 4.4 percent in June.

There are rumours in markets that the figure could be as high as 5.6 percent, driven by a surge in pork and egg prices.

Analysts who contend that price pressures are confined to food took comfort on Friday from a dip in wholesale inflation in July to 2.4 percent, a 14-month low, from 2.5 percent in June.

They said the benign report lends support to the argument that, although the economy has been growing at a double-digit pace for five years, competitive pressures and productivity gains are keeping a lid on broad inflationary pressures.

"It's a figure that should give investors less reason to panic when we get a high-side CPI on Monday," said Ben Simpfendorfer with Royal Bank of Scotland in Hong Kong.

China's economy continues to surge ahead in Q2

Jul 19, 2007 - China's economy grew by 11.9 percent from a year earlier in the second quarter, easily surpassing economists' expectations of a 10.8 percent rise.

Annual consumer inflation in June reached 4.4 percent, a 33-month high.

Following are economists' reactions:

QU HONGBIN, CHIEF CHINA ECONOMIST, HSBC:

"Strong 2Q numbers are likely to prompt some immediate moves in policy tightening. The most likely measures include a 27bp hike in both lending and deposit rates, abolishing of a 20 percent income tax on deposit rates, a 50bp rise in the reserve ratio and new restrictions on lending to certain sectors (e.g. energy-intensive and heavily polluting sectors).

"The PBoC (central bank) is also likely to gradually sell the RMB 1.55 trln special treasury bonds to step up its sterilisation efforts to mop up excess liquidity. In addition, the NDRC (the economic planning agency) is also likely to impose some administrative controls on new investment projects in certain industries.

"However, all these measures are usual stuff. Although they may help stop growth in investment and credit from accelerating further, they won't cause a meaningful slowdown in growth in 2H07. Since higher CPI is almost all due to a surge in food prices, the central bank won't slam on the brakes.

"Forthcoming political events aside, Beijing leaders will have to carefully strike a balance between the need to create 10 million new jobs each year to absorb rural surplus labour and controlling inflation.

"Given the current rate of economic growth, a 4-5 percent CPI should not be seen as a big problem. As a result, the risk of over-tightening in the rest of the year is still remote, in our view. In fact, we see an upside risk to our whole-year GDP projections of 10.6 percent for this year and 11 percent for 2008."

JPMORGAN:

They revised their 2007 GDP growth forecast to 11.3 percent from 10.8 percent, and their 2008 GDP growth forecast to 10.5 percent from 9.5 percent.

They also raised their full-year 2007 CPI forecast to 3.3 percent from 3.0 percent, saying they looked for a gradual moderation in price rises towards the end of the year.

They said that they expect authorities to scrap the 20 percent tax on deposit interest income in the near term, and to raise both lending and deposit rates by 27 basis points once this quarter.

"In addition, the authorities are likely to resort to continuous administrative controls on credit and land supply to contain the risk of overheating.

"We believe that the PBoC is willing to look through short-term volatility in food prices, which will likely stabilise going towards the year-end.

"Fundamentally, we continue to look for faster RMB appreciation as an essential tool to tighten overall monetary conditions and to contain the further widening of the trade surplus.

"We expect USD/CNY to reach 7 by the end of this year. In this regard, the external trade figures in the coming months will be closely watched, especially regarding the impact of the VAT rebate cut on the export sector and the implications for the pace of currency appreciation."

BNP PARIBAS:

"Inflation is accelerating but is particularly driven by the higher food prices, which may be temporary. In any case, inflation remained modest at 3-4 percent year-on-year and is not a major threat yet.

"More worrying for the government would be the continued high growth in investment, which does not show signs of deceleration even after the series of tightening measures, including successive increases in interest rates and bank reserve requirement.

"The data out today will strengthen the case for further tightening, and in specific, we expect to see two more interest rate hikes by year-end, with the first one probably coming out very soon given the strong data today."

HONG LIANG, GOLDMAN SACHS:

The bank raised its forecast for 2007 GDP growth to 12.3 percent from 10.8 percent, and for 2007 consumer inflation to 4.0 percent from 3.6 percent, adding that the risks to their forecasts were on the upside. [ID:nPEK186522]

Liang said that the bank's forecasts assumed that decisive policy tightening would take place in the second half, potentially including two more 27-basis-point increases in interest rates and other administrative measures.

"We see risks on the upside to our growth and inflation forecasts. In particular, if policy tightening is more muted or delayed than expected, we believe growth would run even higher than our forecasts, so would inflation.

"In that case, the risks for some more pronounced cyclical volatilities in the next 12 months would significantly rise."

In a separate statement, they noted:

"The policy making process in the near future could be complicated by political events as the Chinese leadership is expected to be reshuffled around the 17th National Congress of the Chinese Communist Party in the fall of 2007.

"We expect the core leadership to remain unchanged, which assures policy continuity and stability. However, during the run-up to the election, we may see a slower-than-usual policy making process because of the uncertainties surrounding personnel decisions."

China's Economy in 2007

Summary

• GDP grew 11.1 percent in the first quarter of 2007. Similar growth is expected in the second quarter.


• China's trade surplus hit $63.3 billion at the end of April--88 percent higher than in the first four months of 2006.


• Foreign exchange reserves also jumped spectacularly in the first quarter, up $135.7 billion since the end of 2006.


• The RMB appreciated more slowly than expected in the first few months of the year--at an annual rate of about 2 percent. In mid-May, China widened the band within which the currency may fluctuate per day from +/- 0.3 percent to +/- 0.5 percent.


• Though the economy as a whole is not overheating, overheating is a risk in industries where investment has been high in recent years.


• The consumer price index rose to 2.8 percent in the first four months, boosted by rising food and fuel prices.


• In the first four months of the year, consumption, measured by retail sales, rose 15.1 percent over the same period in 2006.
  

GDP

China's economy expanded at a faster-than-expected rate of 11.1 percent in the first three months of the year, largely driven by fixed-asset investment and exports. Similar growth is expected in the second quarter. Most economic indicators delivered a stronger performance than in the first quarter of 2006 (see Table 1), leading economists to expect cooling measures such as higher interest rates and reserve requirements, as well as administrative directives on bank lending and project approvals. Because inflation remains relatively low and the economy shows no sign of transportation bottlenecks or raw material shortages--classic indicators of an overheating economy--cooling measures are expected to be moderate.

Forex Reserves Skyrocket

Foreign exchange (forex) reserves jumped spectacularly in the first quarter, up $135.7 billion since the end of 2006. Although a significant portion of the increase can be attributed to export earnings and inflows of foreign direct investment, a large chunk--$73.3 billion--is unaccounted for, according to press reports. Some reports have suggested that this amount could be the result of the unwinding of several currency swaps, the return of money to the central bank as it prepares to set up an entity to invest a portion of the reserves in higher-return investments, and the return of money raised abroad by Chinese companies' initial public offerings. But by mid-May, when reserve accumulations were running at about $45 billion a month, some analysts were suggesting that at least some speculative inflows were involved.

Bubble in the Stock Market

Indeed, some analysts connect the massive forex inflow to the enormous gains in the domestic stock markets. The Shanghai market is reportedly up 40 percent this year and 200 percent in the last 18 months. For most people, investment options in China are limited to bank savings accounts and the stock markets, and individuals are investing heavily in the market in the hope of striking it rich. A burst bubble could have unpleasant social consequences. On May 30, the stock market's benchmark index lost 6.5 percent after the government tripled the tax on stock trades. Economists expected this would have only a temporary effect on the market. UBS AG expects the government to take further measures, likely more administrative restrictions on new inflows, measures against leveraging, and taxes on capital gains and short-term sales.

The RMB's Slow Appreciation

The renminbi (RMB) appreciated more slowly than expected in the first few months of the year--at an annual rate of about 2 percent--possibly in an attempt to discourage speculative capital inflows. (A rapidly appreciating RMB would likely attract even more speculative inflows, making China's economy even harder to manage.) The RMB has gained a little more than 6 percent since 2005, including the July 2005 revaluation of 2 percent. In mid-May, press reports cited a Chinese Academy of Social Sciences economist who supports the government's gradual approach and who argued that a rapid rise in the currency would strain the economy. In addition, the Ministry of Labor and Social Security released a report saying that appreciation of another 5-10 percent would result in 3.5 million more unemployed and affect 10 million farmers.

UBS opines that China has two choices: re-peg the RMB or do a significant one-time revaluation. Though the RMB broke the 7.70 barrier in mid-May, observers noted that it only did so as the US Congress convened hearings on the subject and as the Strategic Economic Dialogue (SED), which took place May 22-23, approached.

With trade numbers indicating China's trade surplus hit $63.3 billion at the end of April--88 percent higher than in the first four months of 2006--China's delegation faced strong pressure from the US side to let the currency appreciate. In what many analysts described as a move to defuse some of the tension before the second SED meetings, China on May 19 widened the band in which the RMB may fluctuate per day from +/- 0.3 percent to +/- 0.5 percent. Since the 2005 revaluation, the RMB had never tested the 0.3 percent barrier.

China's protestations that it cannot afford a stronger currency seem to be undermined by the fact that its trade and current account surpluses are growing more rapidly than ever, despite the appreciation seen so far. Nevertheless, despite the SED discussions, a larger revaluation is not expected, as PRC officials and economists have consistently said the RMB will maintain its gradual pace of adjustment.

Investment Still High

Though the economy as a whole is not overheating, overheating is a risk in industries where investment has been high in recent years, such as steel, cement, autos, and real estate. Despite government efforts to cool these sectors, investment in, for instance, the manufacture of nonmetallic mineral products (many of which are used in construction) rose 41.2 percent, while investment in the smelting and pressing of nonferrous metals jumped 54.8 percent in the first quarter. Reflecting high levels of previous investment, production of alumina, aluminum products, ferro alloy, 10 types of nonferrous metals, and cars each jumped between 30.8 and 53.7 percent year on year.

The source of much of this excess investment is corporate retained earnings. Many state-owned firms are profitable; in the first two months of the year industrial profits jumped 43.8 percent over the first two months of 2006. Because they have not been required to pay dividends and have had limited options for otherwise channeling retained earnings to efficient uses, firms tend to reinvest profits in more capacity or in other projects such as real estate development. When firms build excess capacity, downward pricing and margin pressures result, increasing loan default and bankruptcy risks.

Chinese officials appear to be heeding recommendations by numerous analysts on ways to remedy this situation. On May 30, China announced that it would require the 158 central-government-owned firms that report to the State Asset Supervision and Administration Commission to pay dividends to shareholders later this year. A Wall Street Journal article reported that provincial and local governments would be responsible for formulating dividend policies for companies under their control.

CPI Is Rising, But Is Not Yet a Worry

The consumer price index rose to 2.8 percent in the first four months, boosted by rising food and fuel prices. Core inflation remained low. The government seems unfazed by the rise for two reasons. First, inflation stayed below 3 percent for the period. (The government aims to keep inflation no higher than 3 percent for the year.) Second, rising food prices help boost rural incomes--a key policy goal. The State Information Center forecasts CPI of 2.9 percent in the first half.

Consumption Grows Steadily

In the first four months of the year, consumption, measured by retail sales, rose 15.1 percent over the same period in 2006, 16 percent in urban areas and 14.6 percent in rural areas. While this growth is welcome, consumption is still weak compared to fixed-asset investment and is not yet a main driver of China's economy. (Reflecting earlier investment in real estate, in April sales of furniture jumped more than 50 percent, while decoration and building materials leapt more than 30 percent.) Rising incomes may be boosting consumption in both rural and urban areas, but structural reforms and a stronger social safety net will be needed to boost consumer confidence--and consumption--significantly.

Money Supply up, Will Interest Rates Follow?

Cash and deposits (M2) rose 17.1 percent in April, higher than the 16 percent target for the year. Banks lent RMB 1.8 trillion in the first four months of the year, more than half the 2006 total. To help cool lending and absorb forex inflows, the central bank has twice raised reserve requirements 0.5 percentage points since the end of the first quarter. The first hike took effect May 15, and the second will kick in on June 5. And on May 19, the rate for a one-year deposit rose 0.27 percentage points, largely to keep real deposit rates positive, and the one-year lending rate rose 0.18 percentage points. These rate changes and reserve hikes are largely aimed at keeping the economy steady, rather than reining it in.

Tables here

China Q1 GDP up 11.1 pct, fastest growth since Q2 2006

Apr 19, 2007 - China's economic growth accelerated to 11.1 pct year-on-year in the first quarter of this year, stoking concerns that the government will take new steps -- possibly including an interest rate hike -- to tame the rapid expansion.

The National Bureau of Statistics said that gross domestic product rose to 5.03 trln yuan in the first quarter, with the growth rate up over the unrevised 10.4 pct rate recorded in the fourth quarter of last year.

The pace of growth was the fastest since the 11.3 pct recorded during the second quarter of last year and compares with the full-year 2006 expansion of 10.7 pct.

Li Xiaochao, spokesman of the statistics bureau, told reporters that the economy is currently growing at a stable pace -- with growth in net exports and consumption offsetting a slowdown in the growth of investment in fixed assets.

But Li also flagged risks to the current phase of China's economic expansion.

'If (the current pace of expansion) continues, the economy runs the risk of going to overheating from relatively fast,' he said.

'Except for the slowdown in fixed-asset investment, all other major economic indicators picked up their growth (rates in the first quarter). Such a speed up is based on an already high base figure,' he said.

Li would not be drawn into any specifics on future tightening policies, but he did say that 'our experience is that we should not take blunt measures but use modest and frequent moves to prevent an economic hard landing.'

He added that the government does not just use the headline GDP indicator in judging the health of the economy, but also takes into account the supply of resources and price levels.

The statistics agency earlier confirmed widespread market rumors that the consumer price index rose 3.3 pct in March, above the government goal of maintaining inflation at or below 3 pct this year.

The statistics bureau said that consumer inflation in the first quarter was up 2.7 pct, due largely to a 6.2 pct gain in food prices.

But Li, while acknowledging inflationary pressures in the economy, said that current price levels are generally stable, downplaying the impact of the price rises.

'The price level is stable in general (but) those for certain categories has risen too fast. Further upwards pressure still exists,' he said. The first quarter CPI rate of 2.7 pct is below the government's 3 pct limit this year and so is 'acceptable',' he said.

He noted that 1.5 percentage points of the first quarter CPI increase was due to the lagging effect from rising grain prices while the CPI in March was down 0.3 pct month-on-month.

Li said that core CPI -- which strips out food and energy prices -- was up 0.9 pct during the first quarter over the same period last year.

He said that the government will take consumer price inflation into consideration as it continues to deregulate prices for electricity, water and gas, though these price reform are likely to add somewhat to consumer price pressures in the period ahead.

Producer price inflation was up 2.7 pct year-on-year in March, slightly higher than the 2.6 pct rate in February. For the first quarter as whole, the PPI rate stood at 2.9 pct, the same rate as in the first quarter last year.

Investment in fixed-assets in urban areas was up 25.3 pct in the first quarter compared with the 29.8 pct recorded during the same period last year.

Overall fixed-asset investment in the first quarter rose 23.7 pct, down four percentage points on the same period last year, the statistics bureau said.

Industrial output was 18.3 pct in the first quarter compared with 16.7 pct during the same period last year and up 17.6 pct during March compared with the 18.5 pct recorded during January-February this year.

First quarter retail sales were up 14.9 pct during the first quarter, rising 15.5 pct in urban areas and 13.7 pct in rural areas.

Retail sales rose 15.3 pct in March alone, compared with the 14.7 pct growth recorded during the January-February period.

'The investment and consumption structure is improving and the upgrading of consumption (trends) is improving with more sales of cars, home appliances and decorative materials,' he said.

The statistics agency said that growth was 'steady and fast' in the first quarter, but noted 'outstanding problems' including the international payments imbalance, excessive liquidity and an 'irrational economic structure' -- meaning investment rising faster than consumption.

It said that the government will 'continue to strengthen and improve macroeconomic controls,' without being more specific.

The People's Bank of China, the central bank, has raised interest rates three times in the last year, and the commercial bank reserve requirement six times, and there are growing expectations that the central bank is poised to move again in the near-term.

(1 usd = 7.72 yuan)