Jump in China inflation paves way for more tightening

Beijing (Reuters): Chinese inflation sped to a 25-month high in October and bank lending blew past expectations, highlighting the challenge faced by Beijing as it battles to keep a lid on price pressures.

A customer selects ham sausage at a supermarket in Shenyang, Liaoning Province

The data left little doubt about why the central bank raised reserve requirements this week and pointed to further tightening steps, from rate rises to yuan appreciation, in coming months.

Markets have already moved to factor in tighter policy with five-year Chinese government bond yields rising sharply in expectations of a rate rise before the end of 2010.

There was no knee-jerk selloff in global markets as there was in October when China first stepped up its tightening. Instead, evidence of the economy’s underlying strength and a belief inflation might drive investors to hard assets lifted commodity prices globally.

A stabilisation of key growth indicators, notably industrial output and capital spending, should give the government the confidence to take more steps to mop up liquidity, reassured that the economy is on solid ground, analysts said.

“The authorities are giving up on the thought that inflation is going to peak soon,” said Dong Tao, an economist with Credit Suisse in Hong Kong.

“I think the tune has changed. That’s very big. It means that what we are seeing now is not just a one-off, but the beginning of probably a long normalisation process,” he said.

China’s headline consumer price inflation rose to 4.4 percent in the year to October from 3.6 percent in September, the National Bureau of Statistics (NBS) said on Thursday.

Producer prices also jumped, climbing at an annual pace of 5 percent, up from 4.3 percent a month earlier.

“Upstream inflationary pressure is starting to build,” said Tom Orlik, an analyst with Stone & McCarthy Research Associates in Beijing.

The figures would propel “the fight against inflation to the top of the policy agenda,” he said.

The central bank raised interest rates last month for the first time in nearly three years and increases in bank reserve requirements this week mean big banks have to set aside a record level of funds.

The yield on the benchmark five-year government bond rose 26 basis points in the first half of the trading day, reflecting a view that it is just a matter of time before the next rate rise.