China's Inflation Climbs to 37-Month High

BEIJING, Aug. 10 (Xinhua) -- China's inflation unexpectedly accelerated to a 37-month high in July, putting the government in a tough position as it faces the daunting task of taming prices and ensuring growth amid a faltering global economy.

The country's Consumer Price Index (CPI), a main gauge of inflation, surged 6.5 percent in July year-on-year, up from a three-year high of 6.4 percent in June, the National Bureau of Statistics (NBS) said on Tuesday.

The stubbornly high inflation rate has been driven by increasing food costs, which rose by 14.8 percent in July from a year ago. The price of pork, a staple food in China, soared by nearly 57 percent in July.

The Chinese government has made stabilizing prices a top priority in the second half.

To soak up liquidity, the central bank has ordered the nation's banks to set aside a record high of 21.5 percent of their cash in reserves and increased benchmark interest rates five times since October.

However, the government will be reluctant to tighten further given that the faltering global economy could impact on growth in China, said Liu Ligang, director of economic research department of ANZ Greater China.

The world's second-largest economy has shown signs of cooling down, with GDP decelerating to 9.5 percent in the second quarter from 9.6 percent in the first three months. Manufacturing growth also slowed to a 29-month low in July.

Maintaining relatively fast growth while curbing inflation has always been a problem for the Chinese government. It has repeatedly stressed that striking a balance between maintaining growth, curbing inflation and restructuring the country's economy will be its major concerns for this year.

The growth-inflation conundrum may be exacerbated by the U.S. government printing money to pay back its debts, which may worsen global liquidity and make it more difficult for China to counter domestic inflation.

Qu Hongbin, an economist with HSBC Holdings, said that the government is unlikely to change its monetary policy any time soon, as domestic inflationary pressures remain high.

He estimated that headline inflation will remain above 5 percent for another few months before dropping to around 4 percent by year end.

The government should understand that rising production costs are a major contributor to the current high inflation, as its monetary tightening measures have seen little effect so far, said Wang Jun, an economist with the China Center for International Economic Exchange.

Wang said rising labor costs and increased prices for cooking oil are signs that more price hikes will occur in the coming months.

He estimated that pork prices will edge higher over the course of the year, as pork consumption typically increases in the fall and winter seasons.

Higher stock feed prices, labor costs and lower pig numbers due to cheap pork prices over the past two years had caused a dramatic increase in pork prices this year, Yao Jian, spokesman of the Ministry of Commerce, said at a press conference in July.

To ease prices, the government has increased investment to boost live pig supplies and released more pork reserves onto the market.

While inflation is widely believed to keep strengthening, analysts predict CPI will ease in the coming months on lower comparison basis from a year ago.

As oil and other commodity prices are expected to fall, that will bring down Producer Price Index (PPI), the inflation gauge at the wholesale level, which will eventually have an impact on CPI, Liu Ligang said.

China's benchmark Shanghai Composite opened 2.3 percent lower on Tuesday but the losses were narrowed to 0.03 percent at the closing, boosted by expectations that an interest rate hike will not happen in the immediate future.