BEIJING, Dec 11, (Agencies): Chinese inflation soared past forecasts to a 28-month high in November and showed signs of spreading beyond food prices, putting pressure on the government to ratchet up its monetary tightening.
A day before the data, China’s central bank raised lenders’ reserve requirements for the third time in a month to sop up some of the excess cash in the economy that is driving prices higher. With inflation on the march, analysts said that more resolute action was needed.
“At least one interest rate rise is needed for this year, otherwise authorities will give the public quite a surprising message, because if you see inflation but no rate hike, people will doubt the determination to fight inflation,” said Shen Jianguang, economist with Mizuho Securities in Hong Kong.
The data published on Saturday should give the Chinese government the confidence to intensify its tightening, because all signs pointed to impressive growth momentum in the world’s second largest-economy.
Industrial output rose 13.3 percent year-on-year in November, rebounding from a mild dip in October and outpacing market expectations. Capital spending also topped forecasts, rising 24.9 percent in the first 11 months of 2010 from the same period a year earlier.
In an indication that China is slowly continuing its shift to a more consumption-powered economy, retail sales increased 18.7 percent in November from a year earlier.
The data on Saturday, which had been widely leaked in the Chinese market beforehand, followed hefty increases in exports and bank lending that were reported on Friday.
“The numbers show that the economy is relatively hot. Exports were strong, beating expectations, and investment remained high,” Liu Yuhui, a researcher at the Chinese Academy of Social Sciences. “The strength of economic tightening so far has not been as strong as people thought.”
For all the signs of strength, worries will centre on whether inflation is beginning to slip from Beijing’s grasp.

“Current administrative measures to control inflation can depress prices for a while, but rebounds will take place once the measures are relaxed,” said Lin Songli, an economist with Guosen Securities in Beijing.
Several Chinese cities have implemented direct controls to limit food price increases, while the central government has also vowed strong action to eliminate speculation in the country’s commodity markets and punish anyone found to be manipulating food prices.
Food once again was the primary driver of inflation. The cost of food rose 11.7 percent in the year to November, while non-food prices were up just 1.9 percent. But within the non-food category, consumer goods and housing costs registered clear jumps.
“My worry for inflation is that we are seeing a very clear trend of non-food prices increasing. This is consistent with very strong wage increases this year, global commodity prices increasing and very strong money and credit expansion,” Shen said.
The National Development and Reform Commission, a powerful central planning agency, was more confident in its outlook.
In a statement after the data, it said that November’s consumer inflation represented a peak and that the annual pace would fall below 5 percent this month. However, it cautioned that prices would remain elevated in the first quarter next year.

Direction
China’s leaders are meeting this weekend in the Central Economic Work Conference to discuss the policy direction for next year.
The Politburo, the Communist Party’s ruling body, set the tone for the meeting last week when it announced a shift to a “prudent” monetary policy from the “appropriately loose” stance of the past two years.
Many in the market believe the change in wording could pave the way for a more aggressive course of interest rate increases and lending restrictions. China has raised banks’ required reserves six times this year, but increased interest rates only once.
Inflation is especially sensitive in a society where poor families spend up to half their incomes on food. Rising incomes have helped to offset price hikes, but inflation undercuts economic gains that help support the ruling Communist Party’s claim to power.
Tom Orlik, an analyst in Beijing for Stone & McCarthy Research Associates, said it was alarming to see price pressure moving beyond food prices. Housing prices were up 5.8 percent and health care prices were up 4 percent.
But Rothman said Chinese consumers with their growing income levels are in a better position to handle prices increases, and he pointed out that food still accounted for about 75 percent of the November price rises.

“So I think inflation continues to be primarily a weather phenomenon, with monetary policy playing a supporting role,” he said, adding that recent bad weather had contributed to a shortage of food.
Thornton said one can see food prices tailing off week to week, which should show up in next month’s inflation figures.
Inflation has risen well above the 2.5 percent paid on Chinese bank deposits. That has triggered an outflow of cash into stocks and real estate as families seek a better return, fueling fears of a dangerous price boom and bust.
Analysts have said inflationary pressure could spread to other areas unless the government hikes rates and tightens credit.
China on Friday ordered its banks to increase their reserves in a move to curb lending.
Communist leaders are trying to guide China’s rapid expansion to a more sustainable level after growth eased to 9.6 percent in the three months ended September, down from a post-crisis peak of 11.9 percent in the first quarter.
But any moves that further slow growth could affect the United States, Australia and other economies by cutting demand for their exports of iron, machinery and other goods.
Costs for fuel and other necessities in China have also jumped as supplies have run short.
Coal, which fuels about three-quarters of the country’s electricity generation, is a special concern, especially in winter months when it is also used in heating systems in the north.
The National Development and Reform Commission, China’s main economic planning agency, has forbidden provinces from limiting shipments of coal beyond their borders, ordering them to ensure stable supplies.