China Inflation Reaches 11-Year High, Trade Gap Grows

China's inflation accelerated at the quickest pace in 11 years and the trade surplus swelled, adding pressure on the central bank to raise interest rates and let the currency appreciate faster to cool the economy.

Consumer prices rose 6.9 percent in November from a year earlier after climbing 6.5 percent in October, the statistics bureau said today. That was more than the 6.5 percent median estimate of 21 economists surveyed by Bloomberg News.

Surging food and fuel costs and a record $238 billion surplus in the first 11 months have prompted the government to name inflation and overheating as the biggest threats to growth. U.S. Treasury Secretary Henry Paulson is in Beijing to press for yuan gains that would narrow the trade gap and staunch the flow of money into the world's fastest-growing major economy.

Liquidity from the trade surplus will continue to cause the economy to overheat in 2008, said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. The yuan will need to appreciate at a firmer pace, interest rates will rise and the reserve requirement for banks will go to 17 percent by the end of next year.

The yuan gained by the most in a month against the dollar. The currency, which has climbed 12 percent since a fixed exchange rate was scrapped in July 2005, rose 0.22 percent to 7.3792 per dollar as of 4:46 p.m. in Shanghai from 7.3952 late yesterday. It touched 7.3770, the highest since the end of the dollar link.

The People's Bank of China last week ordered lenders to set aside 14.5 percent of deposits as reserves, up from 13.5 percent. China's one-year lending rate is at a nine-year high of 7.29 percent after five increases this year.

U.S. Gap

The yield on the 4.68 percent bond due September 2022 rose 4 basis points, or 0.04 percentage point, to 4.72 percent.

The trade surplus climbed 14.7 percent to $26.3 billion in November from a year earlier, the third-biggest monthly total, the customs bureau said today. The $15.2 billion trade surplus with the U.S. pushed the 11-month total with that country to $149.2 billion.

The central bank will strictly control bank lending, raise interest rates this month and allow a faster pace of currency appreciation in 2008, said Liang Hong, a senior economist at Goldman Sachs Group Inc. in Hong Kong.

Export Growth

People's Bank of China Governor Zhou Xiaochuan said today that currency policy will be used to help narrow the trade gap.

A stronger Chinese currency would lower import costs and push up export prices. Export growth has slowed from 29 percent in the seven months through July to between 22 percent and 23 percent for each of the past four months, after cuts to tax incentives.

A more flexible currency is especially important now, when the risks of inflation are clearly rising in the Chinese economy, Paulson said last week. The Treasury Secretary, in Beijing for the so-called Strategic Economic Dialogue, is fending off calls in Congress for legislation to punish China for its currency policy.

The inflation rate is almost double the 3.5 percent pace in the U.S. in October. It's also more than the 3.01 percent increase in wholesale prices in India, the key inflation measure for the world's second-fastest growing economy, in the week ended Nov. 24.

China's inflation was 4.6 percent in the first 11 months, more than the central bank's 3 percent target for the year and the key one-year deposit rate of 3.87 percent.

Food makes up a third of the consumer price index and rising costs pose a threat to social stability, illustrated by a stampede last month at a cooking-oil sale that killed three people in the central city of Chongqing.

Overall, food climbed 18.2 percent. Non-food prices rose 1.4 percent, accelerating from a 1.1 percent gain in the previous month. Utility prices including water, electricity and gas rose 5.6 percent.

The inflow of cash from record exports, besides stoking inflation, has also fueled a surge in property and stock prices, with the benchmark CSI 300 Index gaining 152 percent this year. The central bank today ordered banks to tighten rules for real estate loans after property prices in 70 cities jumped 9.5 percent in October, the fastest pace in two years.

China's economy, the world's fourth largest, expanded 11.5 percent in the third quarter from a year earlier.

There's a chance the central bank will raise interest rates again before the end of this year, said Wang Tao, head of economics and strategy for Greater China at Bank of America Corp. in Beijing. The government is also likely to accelerate appreciation of the currency.

Source - Bloomberg