China risks 'Rush' to tighten in 2011 after inflation accelerated from 5%

China avoidance of tracking its October increase interest rates even as inflation accelerates risks of a more abrupt braking next year's fastest growing economy.

Consumer prices rose 5.1 percent in November, the most in 28 months, a report from the statistics office showed on December 11. the producer price inflation of 6.1 percent was higher than the 28 forecasts in a survey of economists.

The central bank held off the weekend in the movement of the rates predicted by analysts from companies such as UBS AG. and the question of Mizuho Securities Asia Ltd. officials "may be in part a product of China's policy of holding down the yuan, as a higher return on deposits and loans would boost the prospects for speculative capital flows that pressure the exchange rate.

"The only reason to stop is the subject of hot money," said Shen Jianguang, an economist at Mizuho Hong Kong who has previously worked for the International Monetary Fund and the European Central Bank. "If they feel overwhelmed by this concern and to refrain from taking this step, inflation will be a big risk next year, and then eventually have to run in the adjustment."

Chinese leaders pledged yesterday to give greater priority to price stabilization in 2011 and better management of liquidity, Xinhua news agency reported after an annual conference in Beijing to establish guidelines for economic policy.

Curb investment

The government will also try to prevent those who "blindly" from investment projects in the next plan of the nation enters into force five years, Xinhua said.

The central bank has raised rates once since December 2007, bringing the benchmark rate for one-year deposits to 2.5 percent and the interest rate to 5.56 percent. In Asia, India has been six times this year, three times Malaysia and South Korea twice.

The yuan has fallen 0.4 percent against the dollar in the last month, closing at 6.6556 in Shanghai last week.

Capital is flowing into China due to monetary easing in developed economies, the strength of the recovery of the nation, and the prospects of higher interest rates and a stronger currency. In addition, the November trade surplus was 22.9 billion U.S. dollars and the banks lent 564 billion yuan ($ 85 million), reports last week.

Too much cash

"The global environment of low interest rates prevent China's central bank to raise interest rates," said Wu Xiaoling, a former central bank deputy governor, December 11 in a speech at a conference of hedge funds in Shanghai. He cited the risk of attracting more capital flows, adding that "the excessive supply of money is a major reason for inflation in China," he said.

the nation's outstanding loans in local currency were 47.4 trillion yuan in November, 60 percent more than two years ago, a central bank report showed last week.

economic data from China in November said the economy is resisting the government's campaign to limit energy consumption in industry and housing market speculation, while inflationary pressures are building.

The industrial-production growth accelerated to an annual rate of 13.3 percent. Food prices rose 11.7 percent and costs related to the residence, such as water charges, electricity and rent rose 5.8 percent.

Inflation Outlook

Inflation can be "relatively high" in the first half of 2011, after facilitating likely below 5 percent this month, the National Development and Reform Commission, the state planning agency above, said on 11 December . In the first 11 months of 2010, consumer prices rose 3.2 percent, above the government's annual target of 3 percent.

Analysts focused on the possibility of a rate increase over the weekend due to the publication of inflation data, eight days after the Communist Party's Politburo said the country would go to a stricter "prudent" the monetary policy next year.

In addition, government leaders met December 10 to 12 in Beijing to establish policy guidelines for next year. London-based Capital Economics Ltd. said the rate move symbolically important could be announced after the conclave.

Instead of raising rates, policy makers have spent the money in the financial system over the past two months by setting higher reserve requirements for banks.

Price controls

On 10 December, said the central bank will raise rates a half percentage point, indicating the largest banks must set aside 18.5 percent of deposits, excluding any additional curbs individual lenders not announced publicly. Barclays Capital Asia Ltd. estimates that as locking up 350 million yuan ($ 53 million).

The government also focuses on administrative measures to combat inflation and its effects, including subsidies for poor sales of food reserves of the State and, where appropriate, price controls on "daily needs."

Rising wages are fueling inflationary pressures. Yum! Brands Inc., which owns the KFC restaurant chain, said last week that its labor costs in China may rise 10 percent or more in 2011.

China must "act quickly and aggressively to deal with inflation," before tackling the longer-term tasks, such as strengthening the role of private consumption in the economy, Stephen Roach, executive chairman of Morgan Stanley Asia Ltd . said on 09 December in Hong Kong.

"The painful correction"

The delay in the use of interest rates and the exchange rate can lead to "a painful correction in a later stage," said Chang Jian, chief economist of China Hong Kong Barclays Capital. Vio including risks of asset bubbles.

The Shanghai Composite Index of stocks has fallen 10 percent from November 08 high, the policy of extending the loss this year to 13 percent, on concern tighter monetary reduce economic growth and profits. Investor reaction to the latest issue of inflation could be silenced when China's stock markets opened today because it leaked before publication, published last week in the Economic Information Daily.

The economists expect an increase of 1 percentage point in the key lending and deposit rates late next year, according to the median forecast in a survey on 2 December. The gross domestic product will grow 9.2 percent in 2011, shows the average projection.

Economists, including Societe General SA, expect the government to establish an objective of lower borrowing for next year.

government's ceiling of 7.5 trillion yuan this year "is almost certain to be breached," according to Bank of America-Merrill Lynch. Banks need to limit new loans in December to less than a tenth of the amount of November to reach the target.