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China Inflation Highest in Nearly 12 Yrs.

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[March 11, 2008]  BEIJING (AP) -- Soaring food costs drove China's inflation to its highest level in nearly 12 years in February, according to data reported Tuesday, raising the risk of unrest as communist leaders prepare for the Beijing Olympics.

The 8.7 percent rise in the consumer price index over last February exceeded forecasts and raised the likelihood of interest rate hikes or emergency steps by Chinese leaders, who already have imposed price controls on food.

Communist leaders worry about a political backlash if soaring prices erode rising living standards. Bouts of high inflation in the 1980s and '90s sparked protests, a scenario they want to avoid amid global scrutiny of China ahead of August's Summer Games.

Inflation was driven by a 23.3 percent jump in food costs, according to the National Statistics Bureau. Such rises are especially worrisome to Chinese leaders because they hit the country's poor majority hard.

"I'm concerned that there will be demonstrations. The government must recognize this," said Robert Broadfoot, managing director of Political and Economic Risk Consultancy Ltd. in Hong Kong.

Food price inflation "hits poor Chinese a lot harder than Chinese who have benefited from the economic boom," Broadfoot said. "When people already are marginal and just can't pay, they're going to demonstrate."

Economists say inflation should stay high possibly as late as May before it begins to ebb.

"China will find it difficult to meet the target inflation rate of 4.8 percent for the full year," Jing Ulrich, JP Morgan's chairwoman of China equities, said in a report to clients.

February inflation was China's highest since May 1996, when prices rose 8.9 percent, according to Goldman Sachs.

Overall inflation was up sharply from January's percent 7.1 percent rate. Economists had forecast a rate closer to 8 percent.

Beijing has raised interest rates repeatedly and is trying to boost food production to ease inflation pressure amid a boom that saw economic growth rise to 11.4 percent last year.

Those efforts were hampered when the worst snowstorms to hit China in five decades blanketed the south in January and early February. The snows wrecked crops, killed farm animals and paralyzed shipping. Shortages of meat and vegetables caused prices to soar in snow-hit areas.

Prices began to climb in mid-2007 due mostly to shortages of pork, China's staple meat, and grain. But government data also show pressure for across-the-board price rises is increasing as factories and households compete for resources.

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Inflation should "remain high at elevated levels in the near term even after the temporary weather-related impact dissipates," Goldman economists Yu Song and Hong Liang said in a report to clients.

They said they expect Beijing to respond by raising interest rates, tightening controls on bank lending and allowing China's currency, the yuan, to rise faster in value. That could help to cool inflation by narrowing China's swollen trade surplus and reducing the amount of cash flooding into the economy.

Among consumer goods, pork prices shot up 63.4 percent in February compared with the year-earlier period, while fresh vegetables were up 46 percent and cooking oil 41 percent, according to the statistics bureau.

In an attempt to control inflation, regulators froze prices of gasoline, electricity and other basic goods in September. In January, food processors were ordered to get approval for any price hikes. Fertilizer prices have been frozen to protect farmers.

Subsidies to farmers have been increased to encourage them to raise more pigs. Curbs have been imposed on grain exports to increase supplies available on domestic markets.

Inflation for non-food consumer goods was still low in February, with prices up 1.6 percent from the year-earlier month, figures showed.

But wholesale data reported earlier show pressure for price rises in other areas is growing.

The cost of basic oil products jumped 37.5 percent jump in February while that for steel products was up 29.6 percent, the statistics bureau said Monday. Food-related raw materials rose 11 percent.

Rising prices for iron ore, grain and other raw materials will squeeze Chinese companies' profits, raising doubts about their growth prospects, said JP Morgan's Ulrich.

"The beneficiaries of higher inflation remain the resource suppliers -- many of which are outside China," she said.

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On the Net:

National Statistics Bureau (in Chinese): http://www.stats.gov.cn/

[Associated Press; By JOE McDONALD]

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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