China food costs push inflation to 5.5 pct in May

[June 14, 2011]  SHANGHAI (AP) -- China's inflation rose to its highest level in nearly three years in May, thanks largely to stubbornly high food prices, adding to economic and social strains that have fanned recent protests.

The 5.5 percent rise in the consumer price index reported Tuesday was in line with expectations but higher than April's 5.3 percent and March's 32-month high of 5.4 percent. The National Statistics Bureau said the main factor was an 11.7 percent jump in food prices.

While food costs are likely to moderate as supplies improve over the summer months, China is juggling conflicting goals. By constraining bank lending in an effort to keep prices under control, it is pinching credit to the smaller, private businesses that drive most job creation and much of the country's growth.

The spate of street demonstrations and bombings, from Inner Mongolia in the north all the way to Guangdong in the south, has highlighted the precarious balance the communist leadership is striving to maintain while keeping the world's second largest economy growing at a stable pace.

Surging prices for food and other basic necessities have added to the frustrations over inequality, abuse of power and suppression of legitimate grievances that drove recent turbulence.

"My pension increases once a year by more than 100 yuan ($13), but I can't afford increases in food costs," said Ma Chuanyi, a retired elementary school teacher. "I find that what increases the most is the cheaper foods. The high quality meat or cooking oil increases less than the cheaper ones. I think the poorer people must be affected the most."

Drought and other weather disasters have decimated crops in wide parts of the country, as rising consumer demand pushes prices higher. Strong demand in construction and other industries has added to those pressures, spurred by a bank lending spree meant to fight off the impact of the 2008 global crisis.

On Tuesday, the central bank lifted the ratio of funds banks must set aside as reserves by a half point in its sixth such attempt this year to contain inflation. The latest increase, to a record 21.5 percent of deposits, will take effect June 20.

There are good grounds for caution, given the risk that rising food prices could spill into more generalized inflation, said a research note by IHS GlobalInsight economists Xianfang Ren and Alistair Thornton.

"It should be noted in particular that nonfood inflation accelerated markedly in May to contribute to higher headline inflation," they said.

In Shanghai, the country's commercial hub, residents are feeling the pinch of surging rent and food prices.

"Everything is becoming more and more expensive. My landlord hit me with a rent increase yesterday, after raising it almost every year. Vegetables and meat are also expensive," said Zhang Shihua, an online clothing shop owner from neighboring Anhui province who has lived in the city for eight years.

"We're now considering moving back to Anhui," she said.

Mindful of inflation's role in eroding the economic gains that underpin their claim to power, China's communist leaders have made taming prices a priority, while seeking to steer economic growth from the sizzling 9.7 percent rate in the first quarter to a more sustainable level.

The government reported Monday that bank lending slowed in May, indicating that repeated interest rate hikes and increases to reserve requirements may finally be reining in the excess lending that has helped drive prices higher.

"Weakening credit growth and a slowing economy present a policy dilemma when inflation is still high," said Mark Williams, senior China economist at Capital Economics.

May's figures indicate mixed results.

Investments have remained relatively strong in real estate and in state-dominated heavy industries, where excess capacity remains a big problem.

China's industrial output rose 13.3 percent in May, the statistics bureau reported, while investments in construction, factory equipment and other "fixed assets" rose 25.8 percent in January-May over a year earlier. Investment in property jumped a whopping 34.6 percent.

Authorities recently announced initiatives aimed at encouraging more lending to smaller businesses that comprise the relatively dynamic part of the economy. But the persistence of inflationary pressures both at home and globally has prompted economists at the World Bank and private research institutes to urge that Beijing not loosen controls too hastily.

"A combination of solid growth and rising inflation means that policy makers should, and can afford to, tighten monetary conditions further," said Dariusz Kowalczyk of Credit Agricole in Hong Kong.

Beijing has hiked interest rates four times since October and ordered companies to hold down prices.

Many in China expect the central bank to go ahead with at least one more interest rate hike this month or next, especially with state media reports forecasting that inflation could rise further, to about 6 percent, in June.

May's price increase was the fastest since July 2008, when inflation clocked in at 6.3 percent. It peaked at 8.7 percent in February 2008 but fell back under the shock to export demand from the global crisis.

Prices are heavily weighted in China's calculation of its consumer price index, a reflection of the relatively large share of spending that goes to food.

[Associated Press; By ELAINE KURTENBACH]

Associated Press researcher Fu Ting contributed to this report.

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