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BookmarkBEIJING (MarketWatch) — China’s policy makers are grappling with an uptick in inflation, just as industrial output and retail sales seem to be softening, data released on Saturday showed.
Compounding the challenges for the government, property sales have been soaring, rising 77.6% from last year’s levels in value terms over the first two months of the 2013, and highlighting the difficulties in keeping the economy growing at a steady pace while avoiding steep rises in prices.
China’s consumer inflation jumped to 3.2% year-on-year in February, up from 2% in January for the highest increase since April last year, though prices were likely boosted by the Lunar New Year holiday, which often sees a spike in prices for food and other goods.
“The Chinese government is caught in the dilemma of dealing with slower growth and higher inflation yet again,” said Xianfang Ren, senior economist at IHS.
Industrial production grew slightly more slowly, with a 9.9% year-on-year rise in January and February, after a 10.3% gain in December. The government releases combined figures for the first two months of the year to avoid distortions related to the timing of the Lunar New Year holiday.
After months of relatively subdued inflation, rising prices may once again have policy makers worried. Premier Wen Jiabao, in his report to the annual session of parliament on Tuesday, set an inflation target of 3.5% or below for this year, and the central bank has dropped hints of monetary tightening later in the year.
The sharp climb in property prices prompted the government to say earlier this month it would strictly enforce a 20% profit tax on property sales as a means of holding down speculative activity. The tax measure was put in place along with a pledge to require higher down payments and mortgage lending rates in areas where prices are seen as rising too quickly.
While the rise in consumer price index (CPI) was somewhat steeper than expected in February, some analysts said that the index could drop back in March.
“The rise of the CPI was driven by the holiday effect, as well as very loose monetary policy,” Nomura economist Zhang Zhiwei said in a research note.
But Zhang said that inflation concerns won’t go away.
“If monetary policy remains at the current loose stance, CPI in 2013 will likely be much higher than the 3.5% target,” he said. “We therefore expect policy will tighten.”
Other indicators of economic activity softened in the first two months of the year. Retail sales were up 12.3% year on year in January and February, compared with a 15.2% year on year rise in December.
Electricity output, which is closely watched in China because of concerns about the quality of other data, was up 3.4% year-on-year in the same period, compared with growth of between 6% and 8% in the final months of last year.
Fixed-asset investment rose 21.2% year-on-year in January and February, compared with a 20.6% year on year rise in the whole of 2012. But some analysts argue China needs to shift away from its investment-led growth model if it is to keep inflation under control.
“We believe that if Beijing can curb investment demand, inflation should be under control,” Bank of America Merrill Lynch economist Lu Ting said in a note, forecasting that inflation will fall back to below 3% until the middle of the year and then could rise as high as 4% by the end of the year.
