Inflation threat to growth policies

China may put a hold on its expansionary policies due to a 10-month high inflation figure in February, analysts said after the release of the key economic data yesterday.

Manufacturing and investment are still showing robust growth.

The Consumer Price Index, the main gauge of inflation, was up 3.2 percent from a year earlier last month, said the National Bureau of Statistics.

This was a steep rise from January's 2 percent increase.

Although the leap was mainly down to a 6 percent surge in food prices during the Spring Festival holiday last month, analysts said continuing higher inflation seems inevitable.

"China's inflationary pressures come from both supply and demand factors," said Zhou Hao, an economist at Australia & New Zealand Banking Group Ltd.

"On supply, rising wages and environmental costs will continue to lift input prices.

"On the demand side, China's growth led by urbanization via fast investment will likely remain upbeat this year, which will narrow the output gap sharply and add pressure to China's inflation outlook," Zhou predicted.

Zhou warned that inflation poses a threat to policies.

China has targeted to control inflation at or below 3.5 percent for this year as a whole, compared with last year's final rate of 2.6 percent.

Premier Wen Jiabao said in his government work report delivered at the ongoing National People's Congress that inflationary pressure remains high due to rising costs of land and labor, and may be exacerbated by loosening monetary policies in major developed countries.

Liu Xueliang, a researcher with the National Development and Reform Commission, China's top economic planning agency, said inflation has accelerated since the end of last year, though 3.2 percent was higher than expected.

Liu suggested the country should allow bigger movement in exchange rates to reduce the impact of imported inflationary pressure, while some others said the chances are rising that China may lift interest rates or demand banks to put aside more capital as reserves.

The further stabilizing performance of industrial production and fixed-asset investment enhanced the possibility of fewer supportive - if not tightening - policies, analysts said.

In the first two months, China's manufacturing output expanded 9.9 percent from a year earlier, though down from December's 10.3 percent gain.

Fixed-asset investment quickened 21.2 percent during the January-February period, more than last year's pace of 20.6 percent.

Growth of retail sales, a broad measure of domestic consumption, moderated to 12.3 percent in the first two months, a drop from 15.2 percent in December.

Analysts said the government's widely-covered thrift campaign explained the fall, rather than weaker domestic demand.

"Balance between growth and inflation is always an issue for China," said Li Maoyu, an analyst at Changjiang Securities Co.

"It seems that inflation weighs more at this moment."

China's gross domestic product advanced 7.9 percent in the last quarter of 2012, ending a seven-quarter slowdown after the government adjusted its monetary policy and fast-tracked big investment projects.

Some analysts had predicted growth may accelerate to 8.2 percent in the first quarter.