China inflation at near three-year high

Inflation hits 34-month high at 5.5 per cent, powered by rising food prices and commodities.

    China's ruling communist party has been trying to check the rise in inflation, over fears it will lead to social unrest [AFP]

    China's consumer price index, the official measure of inflation, has reached its highest level for nearly three years.

    The National Statistics bureau said on Tuesday that consumer prices in May rose 5.5 per cent over a year earlier, driven by an 11.7 per cent jump in food costs.

    The world's second-largest economy is "still facing significant inflationary pressures" and must implement measures to contain prices, Sheng Laiyun, national bureau of statistics spokesman, said.

    The inflation for last month was up from April's 5.3 per cent rate and exceeded March's 32-month high of 5.4 per cent.

    The figure was in line with economists' forecasts, but well above the government's four per cent target for the year.

    May's inflation rate is the highest in nearly three years, when the index rose to 6.3 per cent.

    Michael Pettis, professor of finance at Peking University in Beijing, told Al Jazeera, "most of us were expecting them [inflation rate] and they are going to continue probably for another month or two before we start seeing them go down".

    "What's more interesting are the new lending numbers, the new loans are down pretty substantially that's really the policymakers' main target," Pettis said.

    "They are going to slowdown expansion in lending and expansion in investment as a way of bringing down activity in the economy.

    "But they are not going to act in a hurry, they are concerned about excessive slowdown and will see continuous gentle slowdown of economy."

    Social unrest

    China's ruling communist party has been feeling nervous about the rising inflation, which has stoked fears of social unrest in the country.

    Violent protests have become frequent in recent years but the past few weeks have been particularly turbulent, with bombings and street demonstrations from Inner Mongolia in the north to Guangdong in the south.

    Though the triggers for the events varied, most have been driven by resentment over social inequality, abuse of power and suppression of legitimate grievances.

    Surging prices for food and other basic necessities have added to those frustrations.

    "Inflation numbers are especially bad in food and less bad in non-food items. And poor people consume much larger share of their basket in the form of food," Pettis said. 

    "So, the 5.5 per cent that we have seen is really an everage, the poor you are, the higher your inflation rate actually is."

    While seeking to impose social "harmony" and cracking down on dissent, the leadership has resorted to a host of economic measures.

    Checking money flow

    In order to check the rising inflation, Beijing has hiked interest rates four times since October 2010.

    Apart from the interest rate rises, China has repeatedly raised the amount of money that banks must keep in reserve to stem credit growth.

    The government reported on Monday that bank lending fell in May, indicating that the government's tightening of the money flow into the market was working.

    "Lot of people are worried about property bubble but am more worried about overinvestment generally: in infrastructure, property and manufacturing capacity," the professor said.

    "Interest rate in China has been way too low for way too long and it's proving increasingly difficult to raise interest rate.

    "But without raising we are going to continue to see lot of overinvestment. For me property bubble is one of the manifestations of overinvestment problem in China."

    But food prices have remained high, as drought and other weather disasters have decimated crops in large parts of the country.

    Rising consumer demand is outstripping food supplies, while a bank lending boom spurred by Beijing's response to the 2008 global crisis has further inflated demand for key commodities.

    China also released other economic data for 2011 on Tuesday.

    Industrial output rose 13.3 per cent from a year earlier in May, but slightly slower than the 13.4 per cent in April amid electricity shortages and a government clampdown on bank lending.

    Apart from industrial output, there were other signs the Asian powerhouse slowed in May - year-on-year car sales fell for the second straight month, new loans dropped more than expected and manufacturing activity lost steam.

    Some analysts are concerned that authorities may have gone too far in trying to slow the economy, which grew a blistering 9.7 per cent in the first quarter.

    SOURCE: Al Jazeera and agencies


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