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CPI outlook may weigh on policy direction

Shanghai Daily, March 8, 2013

Rising inflationary pressure may force China to suspend supportive policies or tighten its monetary stance this month, analysts said before economic data for January and February are due out this weekend.

The Consumer Price Index, the main gauge of inflation, may rebound to around 3.2 percent in February, up from 2 percent in January and 2.5 percent in December, said Lu Zhengwei, chief economist at Industrial Bank.

"The increase is driven by much higher food prices during the Spring Festival holiday," Lu said, adding that such a sharp rise "will induce worries on inflation."

Tang Jianwei, an analyst at the Bank of Communications, was more conservative, forecasting a 2.9-percent rise in CPI for February.

"China has entered another phase of accelerating inflation with stabilizing domestic demand, higher labor costs and rising pork prices," Tang said. He predicted the CPI to grow moderately in the following months, and average between 3 and 3.5 percent this year.

In his government work report earlier this week at the ongoing National People's Congress in Beijing, Premier Wen Jiabao said China aims for inflation at or below 3.5 percent this year, lower than last year's 4 percent target but higher than the final rate of 2.6 percent.

Chang Jian, an economist at Barclays, said inflation and economic activities may add to concerns about the risk of further policy tightening.

"The monetary stance has already returned to neutral," Chang said. "We expect the central bank to continue to actively use repurchase agreements and reverse repurchase agreements to manage liquidity amid strong capital flows and to control credit growth."

Industrial Bank's Lu said more supportive policies or fast-tracked investment projects are not likely to unveiled.

Analysts projected faster growth in industrial production, fixed-asset investment and retail, whose data will be combined for January and February to eliminate the effects of the Spring Festival holiday.