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Shoppers flock to Shanghai streets

Eugene Hoshiko/Eugene Hoshiko/Associated Press

Inflation is accelerating in China, setting the stage for further interest-rate hikes as the country strives to control an overheating economy.

Prices jumped 5.4 per cent in March compared with a year earlier, the fastest increase since July, 2008. Food prices soared 11.7 per cent in the month, a major issue for officials as they take measures to rein in the cost of consumer staples.

China's economic growth, at 9.7 per cent in the first quarter of 2011 or 9.6 trillion yuan ($1.47-trillion U.S.), has slowed from its previous pace, but only slightly.

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Analysts say the latest batch of economic indicators means further government measures are imminent.

"It is a bit of a mixed bag, but our take is overall it's on the strong side," said economist Alaistair Chan of Moody's Analytics' Asia-Pacific department. "We think the government's going to continue with its monetary tightening."

China's government has identified controlling inflation and managing growth as its top priority in its latest five-year plan, goals reiterated in an executive meeting of the governing State Council this week.

"Judging from the inflation situation in the first quarter, we are still under great pressure of price hikes," Premier Wen Jiabao was quoted as saying in the usually secretive session. "We should never lower our guard."

With inflation at a 32-month high, the fast-rising cost of living is on everyone's mind.

"I'm used to it," shrugs taxi driver Wang Guojun , 40, of the food and gas price increases which are quickly eating into his modest monthly earnings of around 5,000 yuan ($770 U.S.) a month. Earlier this month inflation touched his meter, too, with a modest one-yuan (15-cent) fare hike, which drivers grouse makes little difference. "Taxi driving is hard work," Mr. Wang said. "If I stop even just to have a cigarette, I'm losing money."

Government-mandated price controls, already in place on some basic food items, are likely to be expanded to agricultural products, pharmaceuticals, textiles and some household goods.

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The People's Bank has raised interest rates four times in six months, pushing the one-year lending rate to 6.31 per cent currently, while the one-year deposit rate stands at 3.25 per cent. And bank reserve requirement ratios have been tightened nine times since the beginning of last year. As a result, some smaller banks in second- and third-tier cities have been getting out of the home mortgage business completely.

But these and other regulations aimed at slowing the real-estate sector, in particular, have had little impact. Urban real estate sales increased 34.1 per cent in the first quarter over the same period last year, again feeding fears of a real estate bubble such as the one that helped tank the Japanese economy in the late 1980s.

Still ahead, analysts predict, are up to three interest rate hikes before the year's end, further tightening of bank reserve requirement ratios and a continued slow appreciation of the yuan, despite pressure from the United States where officials argue the currency's artificially low value gives Chinese exports unfair advantage. The Chinese currency closed Friday at 6.535 to the U.S. dollar; a year ago, it sat at 6.826.

"A basket of policy measures including monetary tightening, food production acceleration, transportation facilitation and stricter supervision should be fully executed without any reservation," wrote Qu Hongbin, co-head of Asian economics research for HSBC Global Research in a note to clients. "Inflation remains the key macro risk. With little concerns about growth, Beijing should focus on combatting inflation whole-heartedly in the coming months."

"As an economist I would have hoped they would have done it sooner and faster," said Li Wei, an economics professor with Beijing's Cheung Kong School of Business, who said he believes the government is serious about addressing inflation for fear rising food prices will contribute to social unrest.

"The numbers look serious enough. Different countries have different tolerance for inflation. China has historically a very low tolerance for inflation. When inflation hit double digits in the late 1980s, we saw social turmoil," he said.

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The leadership is in part hampered by its own existing programs in addressing inflation, Prof. Li said. Massive bank loans and subsidy programs established to encourage domestic consumption during the last economic recession have contributed to rising prices; now, he said, those subsidies for purchases of cars and household appliances are being phased out and control of bank loans is being reasserted.

"These policies have been so loose, so expansionary before, that these policies haven't [yet]moved into the real tightening sense," he said, warning that inflation hasn't yet peaked this year. "Looking forward, we would expect more political actions that would reduce the expansionary trend, and move toward the neutral … It's going to take some time."

Special to The Globe and Mail

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