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China inflation eases but still a challenge

09 september 2011, 15:09
China said Friday its politically sensitive inflation rate softened in August, but analysts warned that price pressures would continue to trouble the government just as world demand slackens, AFP reports.

Authorities in the world's second-largest economy have been struggling to tame inflation, which they fear could cause more unrest after recent public protests as living costs spike for many millions.

Slightly easing concerns, the National Bureau of Statistics (NBS) said the consumer price index (CPI) -- the main gauge of inflation -- rose 6.2 percent in August, down from a more than three-year high of 6.5 percent in July.

The government has implemented a number of measures over the past year to try to slow inflation, including restricting the amount of money banks can lend and hiking interest rates five times since October.

Analysts said these policies appeared to have had an impact, but warned that inflation -- while expected to drop -- was still likely to remain elevated.

"We are assured it is a peak for this year but any falling back would be very slow," said Yao Wei, a Hong Kong-based economist with Societe Generale.

"CPI is likely to stay above five percent for a long period of time, which is not good news for the central bank."

The government had originally set a target of four percent for inflation in 2011, but China's Premier Wen Jiabao has reportedly admitted it will be difficult to keep CPI within that target.

He said in June that fighting rising prices remained a priority and hoped to keep the level under five percent with "hard work".

Mounting public anger over rising food and fuel prices has already caused a series of protests in China this year, fuelling concerns about inflation.

Foodstuffs account for more than one-third of the monthly spending of the average Chinese consumer. According to the NBS, year-on-year food price rises in August slowed to 13.4 percent from 14.8 percent the previous month.

"Overall, we expect price pressures to ease over the next three to six months," Brian Jackson, senior emerging markets strategist at the Royal Bank of Canada, told AFP.

"But today's is only one month's data. Inflation could bounce back. There's a chance they might tighten policy further if inflation doesn't slow as fast as they'd like."

Analysts said hopes that the government might relax its monetary policy due to the August CPI reading were premature.

"The information we got from top-level officials recently is that this chance is very small," said Liu Hongke, a Beijing-based economist with CCB International, part of China Construction Bank.

"They will not relax monetary policy before there is an obvious slowdown in inflation."

Yao at Societe Generale said she expected the government to adjust some of the measures it has implemented to tame inflation, such as lowering the amount of money some individual banks must keep in reserve.

"But we believe cutting the overall level of reserve requirements or interest rates is unlikely in the short term," she said.

As the United States and Europe stare at fears of another recession after the 2008 financial crisis, analysts said policymakers in export-reliant China were going to have to manoeuvre very carefully.

"They are faced with a weakening external environment and a policy-driven domestic slowdown that heightens calls for a loosening, even as elevated inflationary pressure reduces the space available for that loosening," said Alistair Thornton, China analyst at IHS Global Insight.

"The next six months are going to require some extremely skilled economic driving."

The NBS was due later Friday to release August data for retail sales, fixed asset investment and industrial output.

By Marianne Barriaux

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