China plans to attack inflation with subsidies

China plans to attack inflation with subsidies, sales of food stocks and the threat of price controls may be insufficient, and the central bank will have to raise interest rates, economists said.

Analysts surveyed nine banks this week predict the People's Bank of China will join rate hike last month, the first since 2007 at the end of December. Concern that rising consumer prices, which rose more than two years in October, will jeopardize the economy prompted Premier Wen Jiabao, to hold a cabinet meeting on the issue this week.

The measures introduced by the State Council, from a crackdown on speculation in agricultural commodities to the imposition of price caps for "daily use" if needed, do nothing to address the credit growth in China. benchmark stock index in China has been the greatest two weeks of settlement since May amid concerns that monetary tightening that hinder spending on the fastest growing economy in the world.

"The price intervention would be counterproductive because it can cause panic and worsen inflation expectations," said Liu Li, Gang, an economist at Hong Kong to Australia and New Zealand Banking Group Ltd., who previously worked in Hong Kong Monetary Authority and the World Bank. The measures announced this week "may not be sufficient to bring inflation down quickly."

The Shanghai Composite Index closed 0.8 percent today, after swinging between gains and losses of at least 10 times, comparing this week's decline to 3.2 percent. The benchmark index fell 4.6 percent last week.

Rate Forecasts

Standard Chartered Plc, HSBC Holdings Plc, BNP Paribas, Citigroup Inc., Credit Suisse Group AG, Mizuho Securities Asia Ltd., Royal Bank of Canada, UBS AG and ANZ predict that the central bank will add to increases in quarter point that led the benchmark interest rate from one year to 5.56 percent and the rate of one-year deposits to 2.5 percent.

"Every Friday there is always a possibility that China will do something," said Qu Hongbin, co-head of Asia economic research at HSBC in Hong Kong which indicates an ad for People's Bank of China can not be ruled out for today. At the same time, given the increase this month of the ratios of bank reserve requirements and the measures taken this week, a boost borrowing costs is likely next month, he said.

Supply measures called wet can help price pressures, with a slow rate of economic growth, said Qu.

Threat to the poor

China, the inflation rate reached 4.4 percent in October, exceeding economists' forecasts. Standard Chartered analysts yesterday raised its forecast for consumer price index next year to an average of 5.5 percent, from about 3.2 percent by 2010.

The State Council meeting came amid growing concern about the threat that rising food costs pose to the poorest people in the world's most populous country. More than 81 million people in China will need food rations to survive the winter and spring after the natural disaster, the official Xinhua news agency quoted the Ministry of Civil Affairs.

"Inflation is showing in most foods, obviously, but also rents, wages in the service sector, and non-food products, analysts such as Stephen Green, director of research for Greater China for Standard Chartered, wrote in A report released today. The bank expected to increase the rate of 31 December and three others on June 30.

Money inflows trade surplus, foreign direct investment, and investors on the earnings of bets on the yuan are threatening to push prices to the consumer after the unprecedented lending by banks flooded the economy with cash from the end of 2008.

"Root" of the problem

In Asia, inflation in China compared with deflation in Japan and in the other end, a rate of 9.8 percent in India. In the U.S., consumer prices rose 1.2 percent last month from a year earlier. China's inflation has largely been driven by food costs.

Excess liquidity is the "root of the problem," said Dong Tao, an economist at Credit Suisse Group AG in Hong Kong this week.

Societe Generale, Hong Kong, an economist Yao Wei said that China "old price stabilization policies" will not be sufficient to reduce in the case of monetary tightening. The possibility of "further interest rate hikes by year-end is still relatively high," he said.

The central bank has raised the requirements of lenders subject to drain money from the financial system four times this year and last month raised rates for the first time since 2007.