Chinese inflation sped to a 25-month high in October and bank lending blew past expectations, highlighting the challenge faced by Beijing as it battles to keep a lid on price pressures.
The data left little doubt about why the central bank raised reserve requirements this week and pointed to further tightening steps, from rate rises to yuan appreciation, in coming months.
Markets have already moved to factor in tighter policy with five-year Chinese government bond yields rising sharply in expectations of a rate rise before the end of 2010.
However, while world markets swooned in October on fears that Chinese tightening would dent demand, evidence of the economy's continued strength and a belief inflation might drive investors to hard assets provided a lift to commodity prices globally.
A stabilization of key growth indicators, notably industrial output and capital spending, should give the government the confidence to take more steps to mop up liquidity, reassured that the economy is on solid ground, analysts said.
"The authorities are giving up on the thought that inflation is going to peak soon," said Dong Tao, an economist with Credit Suisse in Hong Kong.
"I think the tune has changed. That's very big. It means that what we are seeing now is not just a one-off, but the beginning of probably a long normalization process," he said.
China's headline consumer price inflation rose to 4.4 per cent in the year to October from 3.6 per cent in September, the National Bureau of Statistics (NBS) said on Thursday.
Producer prices also jumped, climbing at an annual pace of 5 per cent, up from 4.3 per cent a month earlier.
"Upstream inflationary pressure is starting to build," said Tom Orlik, an analyst with Stone & McCarthy Research Associates in Beijing.
The figures would propel "the fight against inflation to the top of the policy agenda," he said.
The central bank raised interest rates last month for the first time in nearly three years and increases in bank reserve requirements this week mean big banks have to set aside a record level of funds.
The yield on the benchmark five-year government bond rose 26 basis points in the first half of the trading day, reflecting a view that it is just a matter of time before the next rate rise.
The yuan hit its highest level since a revaluation in 2005. Its appreciation has quickened this week, which some dealers speculated was a move by China to deflect U.S. complaints that Beijing holds the currency down in order to help exporters, an issue likely to be aired at a G20 summit in Seoul.
In the balance of factors, Chinese investors seemed more excited at the evidence of abundant liquidity than worried at the prospect of higher rates. The main stock index in Shanghai, down before the data, ended up 1 per cent.
Chinese bank shares rose on hopes higher interest rates would improve their net interest margins but most international markets showed little reaction and were more focused on the G20 meeting.
The exception was commodities, where crude oil surged, copper hit a record high and gold maintained its recent allure on expectations inflation fears would drive investors to hard assets to protect wealth.
Jiang Jianqing, chairman of Industrial and Commercial Bank of China and the only banker on the monetary policy committee of the central bank, told Reuters that he expected further tightening.
"It's clear to us that inflationary pressure over this period of time has been very great. Hopefully, the inflation situation can be brought under control with a range of macro-economic policies," he said.
With benchmark one-year lending rates at 2.5 per cent, the sharp rise in inflation puts real rates deeper into negative territory, an inducement to savers to move their money from bank accounts to the stock and property markets.
The rise in inflation was dominated by a run-up in food prices, with core inflationary pressure more muted. But that will give little relief to policy makers looking at surprisingly strong monetary and credit growth.
Chinese banks extended 588 billion yuan ($88.6-billion) of new local-currency loans in October, topping forecasts for 450 billion yuan. And the broad M2 measure of money growth climbed to 19.3 per cent year on year, the highest in five months.
"The strong credit expansion and the M2 rebound suggest that, after QE2 (quantitative easing in the United States), there will be a massive amount of liquidity compounding the excessive liquidity already here," said Isaac Meng, an economist with BNP Paribas in Beijing.
"It is very dangerous," he said.
Industrial output increased 13.1 per cent year on year in October, while urban fixed-asset investment rose 24.4 per cent. Both were down a touch from September, but at levels that would be consistent with overall annual growth of about 9 per cent in the fourth quarter.
"The data showed very strong economic growth. Combined with high inflationary risk, the data will trigger policy tightening," said Dong Xian'an, chief macro economist with Industrial Securities in Beijing.
Moody's Investor Service also delivered a positive verdict about the health of the economy. It upgraded the Chinese government's bond rating on Thursday, citing resilient performance through the global financial crisis.
China raised banks' reserve requirements on Wednesday to lock up some of the cash that is coursing through the economy. It targeted a select number of banks with an extra reserve increase on top of the industry-wide move to mop up even more cash.
Although Chinese officials have directed their ire at U.S. monetary easing as a cause of unwanted speculative inflows, data on Wednesday provided a reminder that a massive trade surplus is the main source of Beijing's liquidity headache.