China’s Inflation, Trade Surplus Rises

By Glenn Dyer | More Articles by Glenn Dyer

Make no mistake; China's economy is getting hotter.

Last weekend the country's central bank lifted the reserve ration by 1%, its largest ever to 14.5% to try and slow bank lending.

That was part of the just announced switch to a 'tight' monetary policy revealed late last week.

Yesterday, the Chinese Government received an even tougher message: inflation is now at the highest level in 11 years, despite price controls introduced two months ago.

And the trade surplus for November was the third biggest on record and the year's surplus will top a massive $US260 billion by the end of this month.

Chinese consumer prices rose 6.9% last month, up from 6.5% in October and 6.2% in September, the country's National Statistics Bureau said.

That was above estimates from economists of 6.4% for Reuters and 6.5% for Bloomberg.

The news won't be welcome for another reason: US treasury Secretary, Hank Paulson is in Beijing with American officials for the third round of the Strategic Economic Dialogue and will push hard for China to allow its currency to more freely float as an anti-inflationary tool.

The Chinese Government will push back because it is unwilling to allow the added complications from a floating currency (or more freely floating now than the managed float) to disrupt an economy that is running too hard. The Government fears a freer currency would help push up social unrest by causing unemployment to rise.

Food prices jumped 18.2% in November from the same month of last year, up from the 17.6% rate in October. Producer prices of crude oil rose almost 23% in November from a year ago

A shortage of pork continues to be a major factor in driving up meat prices. Pork prices jumped 56% in November from a year earlier. Food makes up a third of the consumer price index and rising costs pose a threat to social stability, which is why the Government brought in controls two months ago.

Non-food prices climbed 1.4% after increasing 1.1% in October and 0.9% in September.

That's still not a worry, but the rate of increase in non-food prices is obviously reflecting the surge in food and fuel costs in the economy. The leakage may start adding to the cost of non-food products in export markets if that continues for too long.

What would also be worrying the Government is that price controls have been in place for more than two months on a wide range of government charges, fees and administrated prices.

The cost of fuel was allowed to rise 10% a month ago to allow Chinese oil companies to recoup higher world prices in higher domestic fuel prices, but that hasn't been enough with continuing reports of shortages, hoarding and an active black-market and higher prices.

For the first 11 months of the year, China's rate was 4.6% against the central bank's target ceiling for the year of 3%.

The National Development and Reform Commission, the country's top planner, says China faces "big'' inflationary pressures in 2008 as food and commodity prices rise and the government deregulates energy prices.

China's economy, the world's fourth largest, expanded 11.5% in the third quarter from a year earlier.

The trade surplus climbed to a record $US238 billion in the first 11 months of 2007 after November's $US26.3 billion.

The November surplus was 14.7% higher at $US26.3 billion compared to November last year, but down on the $US27.1 billion of October.

It was still the third highest trade surplus on record.

China has continued to crack down on bank lending and raised interest rates five times this year to curb inflation, asset bubbles and excessive investment leading to industrial overcapacity.

The one-year lending rate is at a nine-year high of 7.29% and last weekend's move to order lenders to set aside more deposits as reserves was the 10th such order this year.

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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