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(Bloomberg) China Inflation, Industrial Production Accelerate

China Inflation, Industrial Production Accelerate (Update1)
2010-03-11 02:24:58.278 GMT


    (Adds lending data in fifth paragraph.)

By Bloomberg News
    March 11 (Bloomberg) -- China's inflation reached a 16-
month high, industrial output climbed and new loans exceeded
forecasts, adding to the case for the government to pare back
stimulus measures.
    Consumer prices rose 2.7 percent from a year earlier, the
National Bureau of Statistics said in Beijing today, compared
with the 2.5 percent median estimate of 29 economists surveyed
by Bloomberg News. A weeklong holiday may have boosted prices.
Production expanded 20.7 percent in the first two months of the
year after an 18.5 percent gain in December.
    Premier Wen Jiabao aims to hold full-year inflation around
3 percent after banks flooded the financial system with money to
drive a rebound from the global recession. Gross domestic
product grew 10.7 percent last quarter and central bank Governor
Zhou Xiaochuan said March 6 that anti-crisis policies, including
the yuan's peg to the dollar, must end "sooner or later."
    "With economic growth quickening to more than 10 percent
and record lending flowing through the financial system,
economic overheating is a high possibility," Qu Hongbin, chief
China economist at HSBC Holdings Plc in Hong Kong, said before
today's release. "The government will stay very proactive this
year and an inflation rate approaching 3 percent or topping the
target may trigger an interest-rate increase."

                        Lending Growth

    Banks extended 700 billion yuan ($103 billion) of new loans
in February, central bank data showed today. That compared with
1.39 trillion yuan in the previous month and 1.07 trillion yuan
a year earlier. The median estimate was for 600 billion.
    Stocks held gains after the data, with the Shanghai
Composite Index rising 0.4 percent as of 10:16 a.m. local time,
and the MSCI Asia Pacific index advancing 0.5 percent.
    M2, a measure of money supply, rose 25.5 percent, compared
with a 26 percent gain. The government targets 17 percent M2
growth for this year.
    Retail sales rose 17.9 percent in the first two months from
a year earlier, and urban fixed-asset investment gained 26.6
percent. Retail sales grew 22.1 percent in February, the bureau
said.
    Economists often look at January and February numbers
together to eliminate distortions caused by a one-week Lunar New
Holiday. China's 2010 data is also boosted by comparisons with
year-ago levels depressed by the financial crisis.

                       'Entire Toolkit'

    The government "will need to use the entire toolkit,
including higher policy rates and a stronger currency" to
achieve Wen's inflation target, Brian Jackson, an emerging-
market strategist at Royal Bank of Canada in Hong Kong, said
ahead of today's numbers.
    Trade data yesterday showed exports rebounding faster than
economists forecast, while a property market report showed
prices climbing by the most in almost two years.
    Commodity costs, reforms of China's energy and resource
pricing, and the effects of last year's expansion of credit may
add inflation pressures this year, China's top planning agency
told lawmakers last week. Baoshan Iron & Steel Co. and spirits
manufacturer Kweichow Moutai Co. are among companies to have
pushed up prices this year.
    Producer-price inflation climbed to 5.4 percent in February
from 4.3 percent in January, the statistics bureau said today.

                           Yuan Peg

    The central bank hasn't raised benchmark interest rates
since December 2007, before the financial crisis deepened. The
one-year lending rate is at 5.31 percent and deposit rate is at
2.25 percent. China has also effectively pegged the yuan at
about 6.83 per dollar since July 2008 to help exporters.
    The central bank has twice raised lenders' reserve
requirements this year. Deputy Governor Su Ning said this week
that those moves were to prevent monetary conditions becoming
"excessively loose" as the government continues to implement
what it describes as a "moderately loose" stance.
    Policy makers are targeting lending of 7.5 trillion yuan,
22 percent less than last year's actual figure, and pledging to
crack down on property speculation. The government has tightened
second-home mortgages and banks have scaled back favorable home
loan rates.

For Related News and Information:
Most-read stories on China: MNI CHINA 1W <GO>
Most-read China economy stories: TNI CHECO MOSTREAD BN <GO>
For top economic news: TOP ECO <GO>
For top China news: TOP CHINA <GO>
Credit crunch page: WCC <GO>
Government relief programs: GGRP <GO>

--Li Yanping. Editors: Paul Panckhurst, Chris Anstey.

To contact Bloomberg News staff for this story:
Li Yanping in Beijing at +86-10-6649-7568 or
yli16@bloomberg.net

To contact the editor responsible for this story:
Chris Anstey at +81-3-3201-7553 or
canstey@bloomberg.net

(Bloomberg) Roubini Says ‘Super Cautious’ China to Limit Yuan Gain to 4%

+---------------------------------------BCW---------------------------------------+

Roubini Says 'Super Cautious' China to Limit Yuan Gain to 4%
2010-03-07 17:10:17.90 GMT


By Ye Xie
    March 8 (Bloomberg) -- China will limit the yuan's
appreciation to 4 percent over the next 12 months because
of a "super cautious" outlook on the global economy, said
New York University Professor Nouriel Roubini.
    The central bank may end a 20-month peg to the dollar
as soon as the second quarter, allowing a 2 percent one-
step gain, and then let the currency strengthen another 1
percent to 2 percent in 12 months, Roubini said in an
interview in New York. The yuan rose 21 percent between
July 2005 and July 2008, when the government halted its
advance to protect exports during the global recession.
    Roubini's forecast is less aggressive than the median
estimate in a Bloomberg survey of 20 analysts for the yuan
to rise 5 percent to 6.50 per dollar by March 31, 2011.
Chinese central bank Governor Zhou Xiaochuan said on March
6 that the nation should be "very cautious" in exiting
policies adopted during the global financial crisis,
including the exchange-rate stance.
    "It will be less than what they did in 2005 when
everything was going right," Roubini, 51, who anticipated
the global financial crisis, said in the March 4 interview.
"They will move by a token amount. The world is much
cloudier in every dimension. They are super cautious."

                      'Hard Landing'

    Roubini, who chairs New York-based Roubini Global
Economics LLC, has become famous for his pessimistic
projections. In 2007, he correctly predicted a "hard
landing" for the world economy. He said last year that the
global economy would shrink through 2009, only for growth
to resume in the middle of the year.
     Jim O'Neill, the chief Goldman Sachs Group Inc.
economist who coined the term BRICs for Brazil, Russia,
India and China in 2001, said last month that "something
is brewing" on the yuan and predicted policy makers will
allow a one-time 5 percent gain. Twelve-month non-
deliverable forwards traded at 6.6505 per dollar,
indicating bets the yuan will rise 2.6 percent from the
spot rate of 6.8265.
    "We must be very cautious about the timing of
normalizing the policies, and this includes the renminbi
rate policy," Zhou said at a press briefing in Beijing,
using another term for the Chinese currency. A global
recovery "isn't solid," he said.

                     'Sooner or Later'

    China will exit its crisis policies "sooner or
later" as it balances growth and inflation concerns, Zhou
said. Regulators ordered banks to set aside more cash as
reserves and to curb lending after the economy grew 10.7
percent in the fourth quarter, the most in two years.
    Consumer prices probably climbed 2.5 percent in
February from a year earlier, the biggest increase since
October 2008, compared with 1.5 percent in January,
according to the median estimate from 29 economists. A
stronger currency would reduce import prices and may reduce
the need to sell yuan for dollars to maintain the peg.
    "A bit of move in the currency might help," Roubini
said. "If they move it by 2-3 percent, it won't make a
huge difference to inflation pressure. They are always
cautious and won't bow to the pressure from the U.S."
    While President Barack Obama has urged China to let
the yuan climb to aid U.S. manufacturers, Chinese
exporters say a gain of more than 2 percent may wipe out
profits.

                     Export Recovery

    China's overseas shipments rose 21 percent in January
from a year earlier, the fastest pace in 16 months. Fifteen
U.S. senators called for stiffer tariffs on China's imports
last week, accusing the country of artificially keeping the
yuan cheap. A stronger yuan would increase the purchasing
power of Chinese residents and reduce the country's
reliance on exports.
    "Most people are concerned about inflation, I am
worried about the export-led growth model," said Roubini.
"A weak currency and low interest rate is a massive
transfer of wealth from household income to enterprises. It
will take more than three, five years to change China's
model of growth."
    Options traders are increasing their bets on the
currency. Three-month implied volatility, a measure of
expectations for yuan price movements, showed traders
expected swings of 3.27 percent on March 4, a one-year
high, up from 1.07 percent on Jan. 1. The next day the
measure slumped to 2.8 percent as Premier Wen Jiabao said
China plans to keep the currency "basically stable."
    "The Chinese authorities will be in no rush to
further strengthen their currency," said Joe Craven, the
Asia-Pacific head of currencies and fixed-income at
UniCredit Markets & Investment Banking in Hong Kong. "I
view options volatility as being currently too high,
especially in the shorter-end of the curve."

--With assistance from Judy Chen in Shanghai, Belinda Cao
in Beijing and Bob Chen in Hong Kong. Editors: Sandy
Hendry, Laura Zelenko.

For Related News and Information:
Top currency stories: TOP FX <GO>
Currency forecasts: FXFC <GO>
Currency rates: XDSH <GO>
Currency returns: WCRS <GO>

To contact the reporter on this story:
Ye Xie in New York at +1-212-617-2768 or
yxie6@bloomberg.net
Judy Chen in Shanghai at +86-21-6104-7047 or
Xchen45@bloomberg.net.

To contact the editor responsible for this story:
David Papadopoulos at +1-212-617-5105 or
papadopoulos@bloomberg.net
Sandy Hendry at +852-2977-6608 or
shendry@bloomberg.net.