Inflation Risk Rising (hktdc.com)

Inflation remains the Mainland government's chief concern, as consumer prices soared by 8.5% in April following an increase of 8.3% in March due to surging food prices. The central bank raised the required reserve ratio by another half a percentage point for the fourth time this year to the record high of 16.5% while interest rates are kept unchanged.
While the economic damage of the 12-May earthquake will be confined mainly to the quake-stricken Sichuan Province and will be relatively limited for the country, disruption in the production and distribution of grain and meat there would aggravate the country's already mounting inflationary pressure.
Mainland's economy remained relatively strong in April, but the growth of exports and domestic investment are expected to slow in the coming months. Even private consumption which has been holding up well so far could see slower growth if inflation remains persistently high.

Inflation is still the hottest issue of Mainland China's economy following the rebound of consumer price inflation in April. The consumer price index rose 8.5% in April after increasing 8.3% in March and 8.0% in 1Q (Exhibit 1).

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As was the case in the last 10 months, soaring food prices continued to account for the majority of the increase in consumer prices. In April, food prices surged 22.1% after an increase of 21% in 1Q. Leading the soaring of food prices was the price of pork, which surged 68.3% in April and 69.1% in 1Q. Inflation would have been much higher had the authorities not frozen the prices of some of the basic necessities earlier this year.

Soon after the release of the inflation figure for April, China's central bank raised the required reserve ratio for the fourth time this year by 0.5 percentage point to the historic level of 16.5%. The timing of the move shows that the authorities are determined to maintain a tight monetary policy to contain inflation. But their task has been greatly complicated by the deadly earthquake that struck Southwestern China on the same day that the inflation figure was released.

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China Economic Monitor (June 2008). Hang Seng Bank Limited. All rights reserved. Reproduction of article(s) in whole or in part is permitted provided the source is quoted. Please direct any inquiry to Economic Research Department, G.P.O. Box 2985, Hong Kong.