China July inflation picks up, piling pressure on PBoC

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BEIJING: China's annual inflation quickened to a higher-than-expected 6.5 percent in July, putting the central bank in a bind as it tries to keep prices in check without dragging down an economy facing increasing threats from abroad.

The unexpected pick-up kept inflation at its highest mark since June 2008, when global oil prices were soaring toward a record high. Economists polled by Reuters had expected inflation to dip to 6.3 percent, after June's reading of 6.4 percent.

China has acknowledged that inflation will exceed its annual target of 4 percent this year. But with debt crises raging in the United States and Europe, the People's Bank of China (PBoC)is widely expected to hold interest rates steady.

"This is the type of data that should have prompted the PBoC to hike interest rates, but given the current turmoil in financial markets, we expect them to delay it," said Wei Yao, an economist with Societe Generale in Hong Kong.

Asia's stock markets plunged on Tuesday, following deep losses on Wall Street, as investors weighed the risk of another US recession and a worsening sovereign debt crisis in Europe. Some market watchers had hoped for a cooling in Chinese price pressures to offer relief from the global rout.

The US Federal Reserve holds its policy-setting meeting later on Tuesday. With interest rates already near zero, its easing options are limited. Economists see little chance that the Fed will announce another round of bond purchases this time.

Later on Tuesday China will release figures on retail sales, industrial output and domestic investment, which are expected to show the economy held up well even as troubles deepened in two of its biggest export markets, the United States and Europe.

But given China's high inflation, it may not be in a position to reprise its 2008 role of lifting the global economy. Back then, when the Lehman Brothers bankruptcy triggered a worldwide slump, China quickly ramped up a big stimulus package, helping to buffer its own economy and buoy the world.

WHERE TO? Since October, China has raised interest rates five times and cash reserve requirements for banks nine times to combat quickening inflation.

But those measures have not been enough to cap price pressures. Economists had hoped that June might have marked the inflation peak. Although oil prices have dropped sharply since early May, food costs keep climbing.

Tuesday's data showed food inflation at 14.8 percent from a year earlier, up from 14.4 percent in June. Non-food price pressures actually eased to 2.9 percent from 3.0 percent a month earlier.

Pork prices, which were the primary culprit behind June's hot inflation figures, soared again in July despite a slight cooldown in the second-half of the month. They jumped about 57 percent in the year to July, lifting the consumer price index by a hefty 1.5 percentage points.

Overall, the month-on-month rise in the consumer price index was 0.5 percent, ahead of forecasts for a 0.3 percent rise.

The producer price index was up 7.5 percent year on year, faster than the 7.3 percent increase that economists polled by Reuters had predicted and well ahead of June's 7.1 percent rise. That suggests there is still some inflation pressure building in the pipeline.

But if demand drops from the United States and Europe, China's next policy move may be towards easing, not tightening.

"It's time for the Chinese government to relax its policies. It's time for Beijing to announce to the whole world that it will try to stimulate domestic demand again," said Tang Yunfei, an analyst at Founder Securities in Beijing.