NDRC: Inflation Under Control Despite Concern

by 5m Editor
24 June 2011, at 10:03am

CHINA - Inflation in June may exceed last month's 34-month high but will be under control in the second half of the year, the nation's top planning agency said, despite concern over rising pork prices and a drop in grain production following drought and flooding.

"If the pork supply does not increase, the situation may even become worse"
Yuan Mingsong, deputy director at the department of market supervision with the Ministry of Commerce

The National Development and Reform Commission (NDRC) said on Wednesday that the consumer price index (CPI), a major gauge for inflation, could reach a new high in June, after it hit 5.5 per cent in May.

However, in the second half of the year the CPI is likely to taper off from its peak, the NDRC said in a statement released on its website.

The government set an inflation target of 4 per cent for this year. But after the CPI rose, on average, by 5.2 per cent in the first five months, there were concerns over whether the target could be met and if the world's second-largest economy could avoid a hard landing.

According to the NDRC, the high inflation rate in 2011 was mainly due to the rapid increase in consumer prices in the second half of 2010.

The CPI figure might rise to 6 per cent in June, mainly pushed up by soaring pork prices, Ba Shusong, a senior economist at the State Council Development Research Center, which advises the government, said.

Sun Chi, an economist at Nomura Securities, said that retail pork prices are likely to rise sharply this month, and it is possible that the CPI might exceed 6 per cent year-on-year in June.

In the second week of June, average pork prices in 34 major cities increased 80 per cent year-on-year to 17.62 yuan ($2.73) per kilogram. The price surge pushed up food prices in general, which account for about 30 per cent of the CPI basket, the NDRC said.

Pork prices are likely to rise throughout the year, Yuan Mingsong, deputy director at the department of market supervision with the Ministry of Commerce, told China Daily.

If the pork supply does not increase, the situation may even become worse, he said.

Relatively lower pork prices at the beginning of this year led many farms to reduce the number of pigs being raised, which decreased supply. An increase in the price of animal feed also put upward pressure on pork prices, according to Zhu Wenzhao, director of the Shanghai Agricultural Products Central Wholesale Market Management Co Ltd, which provides 30 per cent of wholesale pork in Shanghai.

The drought earlier this year and the ongoing floods in southern China may also affect agricultural production, the NDRC said.

Because of bad weather, wheat production in Shandong province is predicted to decrease by 30 per cent this year, Zhao Kang, a government official from the Shandong Administration of Grain, said.

Shandong is a key wheat producer and accounts for more than 30 per cent of the national crop.

The government has introduced a number of measures to combat inflation.

The People's Bank of China, the central bank, raised the reserve requirement ratio for commercial banks, the amount they have to set aside, by 50 basis points on 14 June. The hike was the sixth this year.

Although the economy slowed down slightly recently, economists said there is no evidence of a possible hard landing.

"We expect price pressures will ease later in the year, but in the very near term headline measures of inflation are above Beijing's comfort level, with risks skewed to the upside," Brian Jackson, a senior economist with the Royal Bank of Canada, said.

A report from UBS Securities also said that the latest economic figures don't support a hard landing.

"We don't think there are enough valid economic reasons to suspend interest rate hikes at this juncture, and therefore, continue to expect a rate hike of 25 basis points in June, and another one in July or August," the report said.

Reconstruction in Japan after the earthquake and tsunami is expected to increase the country's imports from China, which will contribute to the growth of China's GDP, said Jing Ulrich, JP Morgan's managing director and chairman of global markets for China.