China takes steps to beat back inflation

SHANGHAI – China’s economy kept growing at a sizzling pace in the first quarter, but the nation’s inflation rate also remained high, at above 8%, prompting officials today to raise banks’ reserve requirements for the third time this year to slow lending.

The government said China’s gross domestic product, or total output of goods and services, expanded by 10.6% in the January-to-March period from a year earlier. Though that was down from a GDP increase of 11.9% for all of 2007, analysts had expected a sharper decline because of weakening exports and severe snowstorms that disrupted production and travel earlier this year.

In releasing the data today, a spokesman for the National Bureau of Statistics said the government was having a “hard time” trying to keep the economy from overheating while containing inflation.

At current exchange rates, China is the world’s fourth-largest economy. And the latest figures suggest continued robust demand for commodities such as oil, metals and grains. That’s good news for commodity producers and workers globally, but it also will help push up consumer prices that have placed pressure around the world.

Higher food costs have triggered protests in some countries, and inflation is viewed as extremely threatening to Chinese officials. In March, China’s consumer price index rose 8.3% from a year earlier. That was down from 8.7% in February but still at an 11-year high and far above the government’s target inflation rate of 4.8%.

Food prices, up 21% in March from a year ago, accounted for most of the inflation in China. But consumers also paid 6.6% more for housing, and retail prices increased 7.8%, according to official data. Beijing has tried to ease the pain for consumers by freezing retail energy and utility rates and putting price controls on certain foods.

Economists said they expected China’s inflation rate to ease in the coming months, in part because of central government measures such as raising reserve requirements and interest rates and providing support to farm producers to boost supplies. But China has less ability when it comes to prices of commodities set in international markets.

“What is worrisome is imported inflation,” said Zhu Baoliang, chief economist at the economic forecasting department of the State Information Center, a government think tank. He blamed the high price of oil, gold and some other raw materials partly on the weak U.S. dollar, a link that Western economists have also made.

With inflation running high, analysts say, Beijing also is likely to let the Chinese currency continue to appreciate at a good clip. The yuan has gained about 4.2% against the dollar so far this year, compared with almost 7% for all of last year. That’s made Chinese goods more expensive for U.S. consumers, but it’s helped China boost imports and reduce the trade surplus – a contributor to inflation.

An appreciating yuan should aid U.S. companies shipping goods to China, but will hurt other American manufacturers in China as they face higher costs in paying suppliers and workers.

Many Chinese exporters, meanwhile, have complained that the stronger currency has come on top of higher production costs and softening demand in the U.S. and Europe, which have hurt their shipments and forced them to lay off workers.

For the first quarter, China’s exports increased 21.4% while imports advanced 28.6%, resulting in a trade surplus of $41.4 billion, down 11% from the year-earlier period. In recent past years, trade added substantially to China’s GDP growth. This time it was a negative.

China did show strong increases in retail sales, up 20.6% for the quarter, as well as investments in fixed capital such as land, plants and machinery, which increased 24.6%.

Still, Stephen Green, an economist at Standard Chartered Bank in Shanghai, said that given the drag from trade, it was “almost impossible” to come up with a GDP expansion of 10.6% as Beijing reported.

Green said he believed China’s actual first-quarter growth was less than 10% but that Beijing “smoothed out” the number to avoid a backlash from industry and local governments. “A sharply slower GDP number would have triggered a lot more criticism from interest groups opposed to tight money,” he said.

With higher-than-expected economic growth, Beijing now apparently has more latitude to apply measures to fight inflation.

“Seems they want to be able to show the steps on inflation that are needed have plenty of economic strength to support them,” said Donald Straszheim, a China specialist at Roth Capital Partners in Los Angeles.

don.lee@latimes.com