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Wednesday, March 10, 2010

China May Raise Rates ‘Within Weeks’ as Prices Climb

March 10 (Bloomberg) -- China’s inflation accelerated in February, according to a survey of economists, and exports climbed in the month, increasing the likelihood of the central bank raising interest rates from a five-year low.

Consumer prices rose 2.5 percent from a year before, the most in 16 months, according to the median of 29 estimates in a Bloomberg News survey before tomorrow’s report. While the gain was likely exaggerated by seasonal factors, economists project the momentum to continue, sending the rate to as high as 4.4 percent during the year, a separate survey showed last week.

Inflation, property speculation and risks for banks are among Premier Wen Jiabao’s prime concerns after a record 9.59 trillion yuan ($1.4 trillion) of loans jumpstarted growth last year. Central bank Governor Zhou Xiaochuan said March 6 that while stimulus policies must end “sooner or later,” China needs to be cautious in timing an exit because a global recovery “isn’t solid.”

“The biggest danger to the economy is inflation,” said Wang Qian, an economist with JPMorgan Chase & Co. in Hong Kong. “The government needs to manage inflation expectations and may raise interest rates within weeks.”

Wang sees a 0.27 percentage point increase in the one-year lending and deposit rates as early as this month. In January, consumer prices rose 1.5 percent, the third monthly increase after a nine-month run of deflation.

Producer Prices

Price pressures are stemming from rising commodity costs, an overhaul of resource prices and the expansion of credit, the nation’s top economic planning agency said in a report to lawmakers last week. Producer prices may have climbed 5.1 percent in February, the biggest gain in 16 months, the Bloomberg News survey showed.

Baoshan Iron & Steel Co., China’s biggest publicly traded steelmaker, increased prices for March delivery as much as 7.4 percent because of higher demand and raw material costs. Kweichow Moutai Co., China’s biggest producer of spirits by market value, has also pushed up prices.

Wen told the National People’s Congress on March 5 in Beijing he’s targeting inflation of “about 3 percent” for 2010. Last week’s survey of economists indicated that he may miss that goal, with the median estimate coming in at 3.4 percent.

Meantime, trade figures released today showed exports rose 46 percent in February from a year earlier, the third monthly increase and the biggest gain in three years. Imports climbed 45 percent, while the trade surplus narrowed to $7.6 billion, the customs bureau said on its Web site today.

Trade Surplus

Commerce Minister Chen Deming said March 6 that the trade surplus fell 50.2 percent in January and February combined from a year earlier as demand within China, the world’s fastest- growing major economy, boosted imports.

The nation has held its currency at about 6.8 per dollar since July 2008 to aid exporters, and policy makers have signaled they’re looking for a sustained export recovery before loosening the peg.

“We must be very cautious about the timing of normalizing the policies, and this includes the renminbi rate policy,” Zhou said, using another term for the Chinese currency.

China’s economic data this week may also show an easing in credit growth. New loans may have declined to 600 billion yuan in February from 1.39 trillion yuan in January after the government increased reserve requirements for banks, soaking up cash that could fuel inflation. Officials are aiming to pare loan growth to 7.5 trillion yuan for 2010.

ICBC Lending

Industrial & Commercial Bank of China Ltd., the world’s largest lender by market value, will lend less this year than in 2009, President Yang Kaisheng said at a Beijing briefing March 7.

“The key danger is excess liquidity in the banking system,” said Gardner Yeh, an economist at Jih Sun Securities Co. in Taipei. “The government needs to closely monitor credit creation and manage inflation expectations.” He sees another increase in banks’ reserve requirements as early as April.

Urban fixed-asset investment may have increased 25.6 percent in the first two months of this year from the same period in 2009, the survey showed. Industrial output may have gained 19.5 percent.

Retail sales for January and February combined climbed 18.7 percent and industrial production advanced 19.5 percent, the survey showed. Economists combine January and February numbers to eliminate the distortion from a Lunar New Year holiday, something that likely also affected the consumer-price report.

Bubble Debate

Analysts are debating the danger of bubbles in the nation’s asset markets as a consequence of the stimulus. Harvard University’s Kenneth Rogoff and Victor Shih of Northwestern University have warned in the past two weeks that a crisis could result in coming years.

At the same time, Stephen Roach, the chairman of Morgan Stanley Asia, said in a note yesterday that he saw a “false alarm” in tales of asset bubbles or an imminent banking crisis. While there are “very real” risks of asset and credit-market excesses, policy makers will act to ease the danger, he said.

“Pro-active Beijing policy makers are about to dispel yet another false alarm over the imminent perils of Chinese credit and asset bubbles,” Roach said.

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