CHINA - INFLATION

Retail prices and inflation rise in China

4 min

Although the Chinese economy still enjoys a two-digit growth rate, consumers feel the heat as retail prices increased by 20.6% in the first quarter and inflation grew 8.6% in March.

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China's economic growth slowed in the first quarter of the year but soaring food prices kept inflation near a 12-year high, the government said Wednesday.

The cost of food was up 21 percent since the beginning of the year -- a serious concern for the country's communist rulers, who fear that excessive price rises could set off social unrest.

The world's fourth-largest economy grew 10.6 percent in the first three months of 2008 from a year earlier, the National Bureau of Statistics said in a much-anticipated news conference in Beijing.

This was an easing from 2007, when China's economy expanded by 11.7 percent in the first quarter and 11.9 percent for the year, according to data from the bureau.

"Amid the impact of the spreading and growing (US) subprime crisis, policies were put into place in an effective way, leading to steady and fast economic growth," said Li Xiaochao, the bureau's spokesman.

Li also mentioned the worst winter weather in decades, which struck large parts of China in January and February, as a factor impacting the economy.

He said he expected the economy to achieve "sound and fast growth" in 2008, with price stability one of the top priorities for the year.

But the consumer price index, the main inflation gauge, rose 8.0 percent in the first quarter of 2008 from a year earlier after a slight easing of inflation in March, according to the bureau.

Inflation was 8.3 percent in March, it said. In February, it had reached 8.7 percent, the highest since mid-1996.

"Inflation remains the top issue facing the government, as it has a direct impact on people's purchasing power," said Sun Mingchun, an economist with Lehman Brothers.

The government had set a full-year inflation target of 4.8 percent.

Experts say the government is struggling to find ways to rein in inflation without denting economic growth too much.

Industrial output, a key measure of the activity level in the nation's plants and sweatshops, expanded 16.4 percent in the first quarter from a year earlier. It compared with 18.3 percent growth in the first quarter of 2007.

China's fixed-asset investments, the main indicator of state-funded spending on new productive capacity, rose 24.6 percent in the first quarter of 2008 from a year earlier, the bureau said.

This figure did not seem to follow the general slowing trend, as in the first three months of 2007, it had risen by 23.7 percent.

The main reason could be that investments are fuelled by continued ample liquidity in the system.

That liquidity, in turn, is boosted by incoming foreign funds, in the form of exports earnings, foreign direct investments, and speculative money banking on short-term gains.

Chinese retail sales rose 20.6 percent in the first quarter from a year earlier, according to the bureau.

The growth was 5.7 percentage points higher than in the same three-month period last year, it said. This is likely to reflect the high inflation level, as retail sales are in nominal terms.

Despite the slight cooling in figures, China remains the world's fastest-growing major economy, and it remains imperative for policy-makers to keep growth under control, analysts said.

"Now we really need some rate hikes," said Stephen Green, an economist with Standard Chartered in a research note.

"If the credit quota (amount of money the banks can lend) is partially relaxed at some point in the middle of the year, it should be accompanied by rate hikes too."

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