Soaring food prices propelledChina's annual consumer price inflation to 6.5 percent inAugust, the fastest pace in nearly 11 years, cementingexpectations the central bank will defy the global trend andkeep raising interest rates. The inflation rate published on Tuesday, up from 5.6
percent in July, easily surpassed economists' forecasts of 5.9
percent and was the highest reading since December 1996. "Going forward we believe there are non-trivial risks that inflation may continue to edge up," economists at Goldman Sachs
said in a note to clients. "We expect the central bank to respond to higher
inflationary pressures with decisive tightening measures, including two interest rate hikes to the benchmark lending and deposit rates by the end of this year." China also reported a trade surplus for August of $24.97 billion. It was the second biggest on record but slightly lower
than forecast as the ending of some tax rebates dented exports. The ruling Communist Party, aware that inflation has touched off unrest in China down the ages, has voiced increasing concern about the speed of price rises. A senior party researcher warned on Monday that inflation becomes difficult to control once it exceeds 5 percent, while a local paper said Beijing had told schools and colleges in the capital not to raise canteen food prices as inflation climbs. The National Bureau of Statistics said inflation was driven by an 18.2 percent leap in the cost of food, which accounts for a third of the consumer price basket. Meat prices rose 49.0 percent in August from a year earlier, reflecting a shortage of pork, China's staple meat. China's pig population has fallen 10 percent due to blue-ear disease and reduced incentives to rear hogs, including fast-rising feedgrain costs and low prices last year. China, the world's biggest producer and consumer of pork, could quadruple its imports of the meat this year to 100,000
tonnes to ease the shortage, industry sources said on Tuesday. The government has already introduced a raft of incentives to increase the supply of pork. In one downtown Beijing alley
on Tuesday, the inducements seemed to be working: a woman was taking an oinking piglet, and her dog, for an early-morning walk.
CENTRAL BANK ON ALERT
Most economists accept that a central bank can do little about supply shocks such as a shortage of pigs; non-food prices, moreover, rose just 0.9 percent in August from a year earlier. But the People's Bank of China has voiced worries that inflation will start rippling through the economy as people start to expect prices to keep rising and demand higher wages. "The risk is that if the economy continues to grow very rapidly, this inflation, which looks concentrated in food,
starts spreading and influencing inflationary expectations," said Rob Subbaraman, chief Asia economist for Lehman Brothers in Hong Kong. But if people do respond to higher prices by rearing more pigs, food prices could start to fall sharply at a time when weaker U.S. growth might be sapping Chinese exports, he said. "That could unmask severe oversupply in China's industrial sector, which could lead to a flip from concern about inflation to worries about deflation. So you don't want to overtighten," Subbaraman added. To keep a lid on inflation and prevent the world's fourth-largest economy from overheating, the central bank has
raised interest rates four times this year and ordered banks on seven occasions to tie up more of their deposits in reserve. CONCERNED Joerg Wuttke, president of the European Chamber of Commerce in China, said he was not too concerned by current inflation as it was confined to food; supply shortages were likely to ease. But, like many economists, he frets that too much cash is pouring into the banking system from the trade surplus, which jumped 71 percent in the first eight months to $161.76 billion. "What worries me more is the liquidity in the market. There is so much money, and given all these exports and the money that comes back in U.S. dollars and also this easy credit, that really causes a major concern," Wuttke told reporters. Li Mingliang, an analyst with Haitong Securities in Shanghai, expects inflation to accelerate in September, triggering another rate rise in October. Food oil cost 34.6 percent more in August than a year earlier, eggs were up 23.6 percent and vegetables 22.5 percent. It is the rising cost of such everyday goods that has people grumbling and China's leaders worried. Inflation was an
important ingredient in the unrest that led to the 1989 Tiananmen Square pro-democracy protests that were crushed by troops. Zhao Qingming, an economist with China Construction Bank in Beijing, said the near-term outlook for inflation could depend on the autumn harvest. "It seems China will have a bad harvest this year because of droughts and other disasters, and that will push up food prices further," he said.