China is losing the fight against inflation

04/18/2011 2:50 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Now what?

April 15th’s data on GDP, inflation, and bank lending show that nothing China has tried so far has slowed inflation (or the money flows driving it) at all.

So what’s next? Well, today the People's Bank of China raised bank reserve requirements again. That's the 10th increase since the financial crisis ended. But there's no way that's the end of China's war against inflation.
China’s economy grew at a 9.7% annual rate in the first quarter—despite everything from higher bank reserve requirements to increased interest rates that the People’s Bank of China threw at it in an effort to slow growth. Economists surveyed by Bloomberg had been expecting growth of 9.4%. The 9.7% growth rate is insignificantly below the 9.8% rate recorded in the fourth quarter of 2010.

March inflation sped up to an annual 5.4%. That was above the 4.9% rate in February and is the fastest rate of price increases since 2008. Economists had been looking for inflation to climb to 5.2%. Inflation at the producer level—which often translates into future consumer price inflation, grew at a 7.3% rate in March.

Inflation in food prices had been an already deeply worrying 11% in February. But food prices rose at an even worse 12% rate in March. You’ve got to believe that’s causing sleepless nights in Beijing. Official Communist Party history emphasizes the role of run away inflation in the defeat of the Nationalist government in 1948. And the unrest that culminated in the Tiananmen Square uprising in 1989 is frequently linked to rising food prices in official explanations of the event.

Looking at such drivers of inflation as bank lending and money supply growth doesn’t suggest that any turning point in the battle against inflation is near. New bank loans in March grew faster than expected to 680 billion yuan ($100 billion), an increase of 173 billion yuan ($25 billion) from March 2010. Reducing new bank lending, which drives increases in the money supply, has been a key part of the government’s effort to fight inflation. Money supply, as measured by M2, grew at a 16.6% annual rate in March. Economists had expected that March new bank loans would come in near 590 billion yuan and that M2 would grow at a 15.4% rate.The government’s official goal for inflation is 4% in 2011.

After Friday’s numbers that target seems even further away.

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