China may be cautious on easing after inflation pickup

April 9 (Bloomberg) -- China’s inflation accelerated more than forecast in March on a pickup in food prices, signaling that policy makers may exercise caution in adding stimulus to boost growth.

Consumer prices rose 3.6 percent from a year earlier, the National Bureau of Statistics said today. That was more than the median 3.4 percent estimate in a Bloomberg News survey of 33 economists. Food-related costs gained 7.5 percent.

Premier Wen Jiabao’s officials may need to remain alert to the risk of inflation bouncing back even after price increases stayed below the government’s 4 percent target for a second month. China’s economy may have expanded last quarter at the slowest pace in almost three years, showing the limits of the nation’s contribution to global growth as U.S. job growth weakens and concern mounts about Europe’s sovereign-debt crisis.

“The upside surprise in today’s CPI reading is likely to raise concerns about a possible rebound in inflationary pressures among policy makers,” said Song Yu, a Beijing-based economist with Goldman Sachs Group Inc. “The data could limit the magnitude of the policy loosening that likely started in March,” Song said, citing Goldman’s observations on the increasing supply of loans and news reports on the government easing restrictions on banks’ lending capacity.

The Shanghai Composite Index fell 0.9 percent, the most since March 29, while the yuan was little changed at 6.3085 against the dollar.

Song said that “underlying inflationary pressures remain modest” and Goldman Sachs expects price gains to “trend down in the coming months.”

Prevent Inflation Rebound

Authorities will seek to “prevent a rebound” in consumer prices and manage inflationary expectations, Wen said during a visit to southern China from April 1 to 3.

China’s producer price index, a leading indicator for consumer inflation, fell 0.3 in March from a year earlier after showing no change in February, the statistics bureau said. That was the first decline since November 2009 and matched the median forecast in a Bloomberg News survey of 29 economists.

Estimates for the CPI ranged from 2.7 percent to 3.6 percent. The gauge rose 3.2 percent in February, while food prices rose 6.2 percent.

Yao Wei, a Hong Kong-based economist with Societe Generale SA, said the data will complicate the timing of monetary-policy actions as economic growth slows. Inflation may decelerate this quarter because of higher bases of comparison with the same months in 2011, Yao said. She wouldn’t rule out a reserve-ratio cut for April, while an interest-rate reduction is “extremely unlikely.”

Real Savings Rate

The data pushed China’s so-called real savings rate, which excludes inflation, back to being negative after turning positive in February for the first time in two years. The benchmark one-year deposit rate has been 3.5 percent since July.

Tao Dong, chief regional economist at Credit Suisse AG in Hong Kong, said even with the inflation pickup, CPI is “decisively falling” below 4 percent, which “allows more policy flexibility.”

Today’s report showed vegetable prices surged 20.5 percent in March from a year earlier after a 6.5 percent increase in February, while meat and egg prices climbed 11.3 percent last month. The acceleration is “most likely temporary” and the result of bad weather in a couple of vegetable-planting provinces, said Ren Xianfang, a Beijing-based economist with IHS Global Insight.

Prices for clothing and shoes rose 3.8 percent in March, a sign of underlying wage pressures, said Paul Cavey, a Hong Kong- based economist with Macquarie Securities Ltd. That compares with a 0.8 percent rise in March 2011.

Slower Expansion

The economy may have expanded about 8.4 percent in the first quarter from a year earlier, Zhang Xiaoqiang, vice chairman of the National Development and Reform Commission, said April 3, citing initial estimates from “relevant China research institutes.” The statistics bureau is scheduled to release the data on April 13. In the fourth quarter, growth was 8.9 percent.

Elsewhere in Asia, Japan swung to a current-account surplus of 1.18 trillion yen ($14.5 billion) in February after a record deficit in January, the Ministry of Finance said in Tokyo today.

South Korean producer price inflation eased in March to 2.8 percent, the slowest pace in two years, after a decline in agricultural product prices, a Bank of Korea report showed. Taiwan’s exports shrank 3.2 percent in March from a year earlier, a smaller drop than the 4.5 percent median of nine estimates in a Bloomberg News survey.

Russia Interest Rate

Russia’s central bank refrained from cutting interest rates today after signaling that “medium-term” inflation risks are increasing. Bank Rossii left the refinancing rate at 8 percent, as predicted by 21 of 22 economists in a Bloomberg News survey. Greece will report inflation and industrial production data.

In Mexico, a report today may show inflation eased to 3.76 percent in March, according to the median of nine estimates in a Bloomberg News survey. Chile will release trade data for the same month.

China, the world’s largest oil consumer after the U.S., increased gasoline and diesel prices for the second time in less than six weeks on March 20 after crude had its biggest monthly gain in a year, adding to pressure for consumer prices to rise.

China Petroleum & Chemical Corp., Asia’s biggest refiner, said last month it will ramp up crude production and develop natural gas fields to counter losses from selling diesel and gasoline at state-mandated prices. Sinopec, as the Beijing-based company is known, said fourth-quarter profit dropped 23 percent, missing estimates.

Minimum Wages

Shanghai joined Beijing and Shenzhen in raising minimum wages this year as policy makers seek to spur consumer spending and a shrinking labor surplus pushes up salaries. The nation’s financial hub and most affluent city said in February it will raise the figure by 13 percent to 1,450 yuan ($230) a month starting in April.

The People’s Bank of China cut lenders’ reserve requirements effective Feb. 24 for the second time in three months to pump more liquidity into the banking system.

Analysts in a Bloomberg News survey last month unanimously said banks’ reserve requirements will fall this year, while nine of 20 predicted lower benchmark borrowing costs.

Wen said last month the government aims to keep consumer- price gains within about 4 percent for 2012, taking into account risks from imported inflation and rising costs of land, labor and capital.

People’s Bank of China Governor Zhou Xiaochuan said on April 3 that the policy goal shared by China and other emerging nations is to “gradually bring inflation down” to help achieve a so-called soft landing. He didn’t elaborate.

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