China's Inflation Surges 8.7% as Food Prices Soar

China's Inflation Surges 8.7% as Food Prices Soar

March 11 (Bloomberg) -- China's inflation accelerated more than estimated to the fastest in 11 years as food prices jumped, adding pressure on the central bank to raise interest rates.

Consumer prices climbed 8.7 percent in February from a year earlier after gaining 7.1 percent in January, the statistics bureau said today. That was faster than the 7.9 percent median forecast of 22 economists surveyed by Bloomberg News.

Food costs soared 23 percent after the worst blizzards in half a century destroyed crops and snarled transport links, causing shortages. China, the biggest contributor to global growth, needs to weigh the threat from surging prices against the risk that rate increases and weakening export demand will trigger a sharp economic slowdown.

``They must raise interest rates big time -- at least two to three percentage points this year,'' said Andy Xie, former chief China economist at Morgan Stanley, now in Shanghai.

Six rate increases last year pushed the key one-year lending rate to a nine-year high of 7.47 percent. The deposit rate is 4.14 percent, less than half the pace of inflation.

``We need to stay calm and take effective measures,'' the statistics bureau said in a statement. It will be ``more difficult to control full-year inflation'' because of the storms, the bureau said. The government aims to cap price gains at 4.8 percent for 2008.

Stocks Fall

The CSI 300 Index of stocks fell 1.1 percent as of 11:30 a.m. in Shanghai on speculation that a rate increase will dent earnings. The yuan traded at 7.1059 versus the U.S. dollar from 7.1099 before the data was released. The yield on the benchmark 15-year bond rose 1 basis point to 4.17 percent.

Pork prices soared 63 percent from a year earlier, vegetables climbed 46 percent, and edible oil rose 41 percent, adding to the burden on the 300 million people estimated by the World Bank to be living in poverty.

``Food prices make up one third of the consumer price index but for poor households it makes up more than 50 percent of their household budgets,'' said Sherman Chan, a Sydney-based economist with Moody's Economy.com.

In January, the government ordered food companies such as Uni-President Enterprises Corp., an instant-noodle maker, and China Mengniu Dairy Co., a milk producer, to seek approval for any price increases.

Banks' Reserve Requirements

The central bank has pushed banks' reserve requirements to the highest ever to help cool the fastest-growing major economy after an 11.4 percent expansion last year. China contributed 20 percent of global growth in 2007, according to an estimate by the International Monetary Fund.

Exports rose 6.5 percent in February, the least in almost six years, illustrating the risk from weakening demand as the global economy slows.

Non-food inflation was 1.6 percent, up from 1.5 percent in January. Excluding food and energy, prices rose 1 percent.

China's leaders may raise rates this week to signal their determination to fight inflation as legislators meet at the National People's Congress, said Ha Jiming, chief economist at China International Capital Corp. in Beijing. The March inflation rate is likely to be slower, Ha said.

Central bank Governor Zhou Xiaochuan said March 6 that there's room for more rate increases, although any decision is complicated by U.S. Federal Reserve cuts and the government's goal of increasing consumer spending.

China's `Weaknesses'

Raising rates when the Fed has cut them risks attracting more overseas investment into a financial system already flooded with cash from export sales. The government needs to tighten controls on inflows of so-called ``hot money,'' Li Deshui, the former head of the statistics bureau, said March 8.

Economists are split on whether rate increases will do much to rein in prices.

``A rate hike does not help to increase the supply of food or the supply of pork,'' said Sun Mingchun, an economist with Lehman Brothers Inc in Hong Kong.

Liang Hong, senior economist with Goldman Sachs Group Inc. in Hong Kong, said rapid growth in the money supply was the main cause of inflation.

Gains by the yuan play a role in cooling inflation without being the largest factor, the central bank's Zhou said March 6. The currency has climbed 2.8 percent this year versus the dollar, after a 7 percent increase in 2007.

China's producer-price inflation accelerated to the fastest pace in more than three years in February, adding pressure for consumer prices to keep rising.

BLOOMBERG