Jan CPI rises 1.5 percent year-on-year

Mild growth not enough to ease government tightening concerns

China's Consumer Price Index (CPI) in January rose 1.5 percent year-on-year, bringing milder-than-expected growth compared with a 1.9 percent increase in December. Analysts said the slowdown is not enough to relieve market fears of further economic tightening in the first half.

The National Bureau of Statistics (NBS) said on Thursday that food prices rose by 3.7 percent in January while non-food prices rose 0.5 percent.

Economists said the Chinese Spring Festival, which starts Feb 14, and severe weather has pushed up consumer prices.

The relatively lower CPI reading in January compared with the year prior is partly because of the holiday landing in January last year and February this year, analysts said. The festival is usually preceded by a shopping spree and thus rising consumer prices.

While the CPI, a core measure of inflation, may be free from the impact of any imminent interest rate hikes - as the market previously feared - other tightening measures could still be adopted, analysts said.

"This may cap expectations that interest rates will be hiked in the short term," said Sebastien Barbe, head of emerging market research and strategy with Credit Agricole Corporate and Investment Bank, formerly Calyon.

"However on the other hand, 1.39 trillion yuan in new loans was slightly stronger than expected," he said, adding that as a measure designed to mop up liquidity, the authorities may raise the reserve requirement ratio of commercial banks, or the proportion of money they must keep in reserve.

The central bank said Thursday that new yuan-denominated loans in January reached 1.39 trillion yuan, which signals liquidity remains ample in the financial system. The statistics bureau, meanwhile, said that home prices in 70 major cities rose 9.5 percent year-on-year in January, compared with a 7.8 percent rise in December.

"New yuan loans are 3.5 times more than in December and even if, for now, inflation remains under control, the problem is asset prices," Barbe said.

The ample liquidity is believed to be a major source of rising prices for both consumer goods and housing.

Barbe and other economists said the central bank therefore may continue to tighten monetary conditions to keep the risk of a housing bubble under control.

"I think that hikes in the one-year lending rate could wait may be until the second quarter (but) further hikes in the reserve ratio seems likely in the first and second quarters."

Lin Songli, analyst with Guosen Securities, however, insisted that the central bank is likely to increase interest rates before the end of the first quarter.

(China Daily 02/12/2010 page10)