China's consumer price index (CPI) rose 7.1 percent year-on-year in January, its fastest pace in 11 years, and analysts forecast the development would mean further tightening measures by the government.

The January figure was the highest monthly level since December 1996, when the CPI hit 7.0 percent.

The figure reported on Tuesday by the National Bureau of Statistics (NBS) was broadly in line with most forecasts, although it came in below the prediction of China's major state-owned bank. The Bank of China had forecast the CPI for January would be 7.5 percent or higher.

The NBS said that food prices surged 18.2 percent in January, with grain prices up 5.7 percent and cooking oil prices up 37.1 percent. Pork prices, which had been cited as the major factor driving up the CPI in the second half of 2007, soared 58.8 percent in January, the bureau said.

"The CPI was mainly driven up by factors including the snow disaster that ravaged more than half of the country and food price hikes during the Spring Festival," said Yao Jingyuan, chief economist of the NBS.

Not all economists agreed. Song Guoqing, a professor at the China Economic Research Center under the Peking University, said that the bad weather began too late in January to have had more than a limited impact on prices.

"The influence of the snow disaster may emerge in the longer term," he said, predicting that February's CPI might exceed 8 percent.

Song attributed January's CPI rise mainly to the excessive growth of money supply. Central bank measures, including raising interest rates and the bank reserve requirement ratio, hadn't been strong enough to rein in the fast-growing money supply since last July, he said. Although nominal interest rates had risen, "real interest rates are actually dropping."

According to the central bank, the People's Bank of China (PBC), M2 broad money supply, which covers cash in circulation plus all deposits, reached 41.78 trillion yuan (about 5.81 trillion U.S. dollars) as of the end of January, up 18.94 percent from a year earlier, indicating that liquidity remains strong in the Chinese economy.

Last year, the PBC raised the reserve ratio 10 times and interest rates six times to soak up liquidity. The reserve ratio has so far been raised once in 2008. Economists expect further interest rate hikes this year.

"Interest rates will show an evident rise this year, although they might edge up only a little each time," said Yi Xianrong, a researcher with the financial research center of the Chinese Academy of Social Sciences (CASS).

Liu Chaohui, an analyst with Guotai Junan Securities, also predicted that the reserve requirement ratio would be hiked further in the first quarter to reduce liquidity.

Song also suggested that funds pouring into bonds and stocks be taken into account in the calculation of the general money supply, which, if calculated more precisely, would help curb inflation more effectively.

"The central bank shall further tighten its monetary policies, put a brake on lending and accelerate the appreciation of the yuan," he added.

China has made its currency regime more flexible by letting the yuan appreciate steadily. The currency has appreciated about 12 percent since July 2005, when the government started to de-peg the yuan from the dollar.

On Tuesday, the yuan rose 93 basis points to a central parity rate of 7.1574 yuan per U.S. dollar, breaking the 7.16 mark for the first time.

A faster rise of the yuan has been suggested by some economists to help cut the trade surplus. A stronger yuan would make exports more expensive in foreign currency terms.

However, the trend toward a stronger currency has also raised concerns over a flight of foreign investment. "The accelerated appreciation of the yuan will force foreign investors to close their factories in China or transfer them to countries with cheaper wages, adding more pressure to employment," Yi said.

(Xinhua News Agency February 19, 2008)