FocusChina needs tighter credit controls to stave off inflation

11 May 2010 09:20  [Source: ICIS news]

By Fanny Zhang

GUANGZHOU (ICIS news)--China must further tighten access to credits to contain the rapid increase in consumer prices, while mindful of the need to ensure healthy growth in industrial production and investments, analysts said on Tuesday.

A slew of economic data in April showed sustained recovery in economic activities, but this was accompanied by a strong pick-up in inflation.

The country’s consumer price index (CPI) rose at an accelerated pace of 2.8% year on year in April, while its producer price index (PPI) also grew faster at 6.8%, according to the National Bureau of Statistics (NBS).

In March, CPI was up 2.4% year on year, while PPI was up 5.9%.

"The data indicated that inflation (CPI) is nearing the 3% warning level and we expect that prices would keep rising in the next few months,” said Wang Hu, a Shanghai-based analyst at Guotai Junan Securities (GTJA).

The trend makes the need for tighter control on credit urgent, Wang said.

China has a target to keep inflation at an average of 3.0% this year.

Meanwhile, industrial production in China continued to expand at a double-digit rate last month at 17.8% year on year, although at a slightly lower pace than the 18.1% recorded in March, based on official statistics.

The same trend was seen in fixed assets investment, which grew at 25.4% in April from 26.3% in March, NBS data showed.

Higher production went hand in hand with exports recovery, with shipments last month jumping 30.5% year on year to $119.9bn, based on official data.

China is the world’s third largest economy and is the biggest importer of petrochemical products in Asia.

Its overall imports jumped 49.7% to $118.2bn in April.

"[The] overall economy is in good shape. Both investments and consumptions have kept rising since the beginning of this year,” said Liu Qiyuan, chief analyst at Shenzhen-based China Merchants Securities (CMS).

Liu said that the potential risk of overheating had been significantly reduced after China's moves to curb rapid credit growth since the start of the year.

Aggressive lending - largely due to China’s massive fiscal stimulus package - in 2009 bloated the loan portfolio of banks, with nearly yuan (CNY) 10,000bn ($1,464bn) worth of new loans generated.

Consumer prices had begun to spike given too much money floating around in China.

To contain inflation and prevent asset bubbles, the Chinese authorities did a combination of moral suasion to induce banks to lend less and of straight mopping up operations through issuance of central bank bills.

But new loans continued to grow at unprecedented speed, logging a 30.1% surge last month to CNY774bn, based on central bank data released on Tuesday.

Liu said a lot of funds still need to be siphoned off from the system to effectively keep a lid on soaring prices.

“We feel that the government would take measures, like long-term bill issuance and debt yields hikes, to speed up liquidity grips. Otherwise, inflation may go out of control,” Liu said.

($1 = CNY6.83)

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By: Fanny Zhang
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