Property prices and bank lending heat up China’s economy

China’s inflation has accelerated as bank lending exceeded estimates and property prices jumped by a record, increasing pressure on the government to raise interest rates and let the currency appreciate.

Consumer prices rose 2.8 per cent last month from a year earlier, the fastest pace in 18 months, while real estate prices jumped 12.8 per cent, the statistics bureau said yesterday.

Meanwhile, new lending of 774 billion yuan ($157 billion) in the month, announced by the People’s Bank of China (PBOC), the central bank, was more than any of 24 economists polled by Bloomberg forecast.

Chinese stocks fell amid expectations the government will move in earnest to curb overheating.

The Shanghai Composite Index fell 1.9 per cent to close at 2,647.44, the lowest in almost a year. It has slid 21 per cent since November, pushing it into bear market territory.

China’s growth rate is not a problem and Beijing should focus on preventing excessive increases in asset prices and liquidity after Europe’s almost ?750 billion ($1.32 trillion) rescue package reduced the risk of another global slump, PBOC adviser Li Daokui said yesterday.

“Price pressures have been building throughout the economy, strengthening the case for higher interest rates and a stronger yuan,” said Mr Brian Jackson, a Hong Kong-based strategist at the Royal Bank of Canada. “China is at risk of overheating, with spot fires breaking out in various parts of the economy.”

“If inflation is not contained, the central bank will have to raise interest rates,” said Mr Zhao Zifeng, who oversees about US$10.2 billion ($14.1 billion) at China International Fund Management. “We’ll still need to gauge housing prices in the coming months as the previous crackdown measures were put in place not long ago. More tightening policies could follow.”

Twelve-month non-deliverable forwards climbed 0.1 per cent to 6.6721 per US dollar yesterday in Hong Kong, reflecting bets the currency will strengthen 2.3 per cent from the spot rate of 6.8277.

The PBOC hinted at allowing the yuan appreciate in its quarterly policy report on Monday when it changed its language to say that the yuan level would be determined by “market demand and supply and with reference to a currency basket”.

April’s increase in consumer prices compared with 2.4 per cent in March and the 2.7 per cent median estimate of 30 economists surveyed by Bloomberg. Producer prices jumped 6.8 per cent, the biggest in 19 months and above the economists’ 6.5 per cent median estimate.

The jump in property prices in 70 cities was the biggest since publication of the targeted data began in 2005, defying a government crackdown on speculation that intensified last month.

China’s government aims to contain full-year inflation at 3 per cent and avert property bubbles after record credit growth drove an economic rebound.

Investors are concerned that stimulus withdrawal and a slowdown in construction could choke off growth after an 11.9 per cent expansion in the first quarter.

Source : Today – 12 May 2010

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