“…Chinese annual inflation fell in May to 7.7 percent, bucking a global trend, as a year-long surge in food prices ebbed and producers held back from passing on sharply higher energy and raw material costs…”

By Emma Graham-Harrison and Zhou Xin
Source: Reuters

Chinese annual inflation fell in May to 7.7 percent, bucking a global trend, as a year-long surge in food prices ebbed and producers held back from passing on sharply higher energy and raw material costs.

The drop will provide some relief to policy makers who have declared high inflation their main economic challenge, but economists ruled out a softening of the central bank’s tight policy after it published strong money supply data for May.

Within the consumer price index (CPI), food inflation eased to 19.9 percent in the year to May from April’s 22.1 percent pace, the National Bureau of Statistics said.

Non-food inflation nudged down to 1.7 percent from 1.8 percent even though figures on Wednesday showed factory gate prices rose at the fastest rate since late 2004.

“CPI inflation should continue to slow through the rest of the year, because pork prices have peaked, because China is not suffering from a rice shortage, because energy will remain highly subsidised, and because overcapacity limits the ability of most manufacturers to pass on higher raw material costs,” said Andy Rothman, an economist at CLSA in Shanghai, in a note to clients.

The CPI reading confirmed a leak to Reuters on Tuesday and was below forecasts of a 7.9 percent rise.

Beijing is not alone in its struggle with inflation. From Europe to the Middle East and across much of Asia, governments are battling to tame the fastest price increases in years.

China provides most of its own food, which makes up a third of the consumer price basket, so as it recovers from a series of domestic farming setbacks it has largely been able to insulate Chinese families from fast-climbing global food prices.

But rapid industrialisation means China is less able to escape the impact of rising raw material prices, and, unlike Rothman, some economists fear pipeline pressure evident in the producer price index will eventually carry through to consumers.

“The concern is that record factory-gate prices will pass through to consumer prices. So I think the decline in CPI in coming months will be slow and gradual,” said Shi Lei, chief economist at Tianxiang Investment Consulting in Beijing.

The fall was not enough to soothe the Shanghai bourse .SSEC, which fell 2.21 percent to a 14-month closing low.

Energy Price Pressures

Some economists trace inflation not to high commodity prices but to loose monetary policy as the central bank struggles to mop up cash pouring into China from its huge trade surplus.

Annual growth in the broad M2 measure of money supply jumped to 18.1 percent in May, much faster than expected, from 16.9 percent in April, the People’s Bank of China said on Thursday.

David Cohen with Action Economics said the combination of brisk money growth, still-high inflation and Wednesday’s robust export figures would set lights flashing at the central bank.

“It leaves a picture suggesting that the PBOC will be taking further tightening steps,” Cohen said.

Opinions, though, vary widely. JP Morgan’s Qian Wang, in a report to clients, forecast three more rate rises this year, but Wang Qing at Morgan Stanley said he expected the central bank to stand pat as a slowdown in exports was cooling the economy.

While inflation has receded from February’s 12-year high of 8.7 percent, officials acknowledge the government’s full-year target of 4.8 percent is probably beyond reach.

That is especially the case as Beijing is under increasing pressure to raise state-set prices of diesel and gasoline as shortages spread across the country.

They are well below international levels, so if the two are aligned economists estimate the CPI could rise by as much as 2 percentage points.

“Prices are set to rise — as we all know, power and oil product prices are currently kept artificially low,” said Lin Songli, an analyst with Guosen Securities in Beijing.

Some increases may already be trickling through as energy suppliers scramble for any way to protect their margins.

Refining giants Sinopec and PetroChina have been prioritising supplies of price-capped diesel and gasoline to wholesalers, who charge more for their fuel than service stations.

And Shandong, a major steel-making province, has unilaterally raised power tariffs for industrial users by up to 70 percent during peak hours to try and stave off brownouts, according to the government website of Jinan, the provincial capital.