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China's inflation at two-year high

Aus Bus Pix China retail inflation supermarket CPI A shopper at a Shenyang supermarket in China's northeast. Picture by AFP Source: The Australian

CHINA'S inflation hit a two-year high in October, underscoring the challenges it faces in managing its rapid economic expansion.

The consumer price index was up 4.4 per cent from a year earlier in October, the National Bureau of Statistics said today, sharply higher than the 3.6 per cent increase in September and beating market expectations of a 4 per cent gain. The bureau said a rise in food prices, driven both by domestic supply problems and global price pressures, was mainly responsible.

Bureau spokesman Sheng Laiyun said the government would have to work harder to achieve its 2010 CPI target of around 3 per cent and that the country expects a negative impact on China's economy and inflation from quantitative easing policies in other countries, which he said would push global raw materials and agricultural product prices even higher.

The faster-than-expected rise in inflation helps explain the Chinese central bank's recent urgency in tightening monetary policy. Yesterday, the People's Bank of China ordered banks to hold back more of their funds from lending, raising the reserve-requirement ratio by half a percentage point. The move to tighten bank credit came less than a month after the central bank raised benchmark interest rates for the first time in nearly three years.

Speaking at a forum today, deputy central bank governor Hu Xiaolian said the central bank will continue to manage inflation, though she complained that the US Federal Reserve's drive to push down interest rates is contributing to rapid inflows of capital into emerging-market countries.

In a research note, Bank of America Merrill Lynch economist Ting Lu said: "Inflation now replaces asset bubble as the top concern for policymakers as well as investors. Beijing's policy focus is quickly shifting to curbing inflation and containing capital inflows."

The investment bank forecast that China will likely increase banks' reserve ratio by 100-150 basis points by the end of next year and raise interest rates.

Mr Lu said China will likely allow the yuan to appreciate 5 per cent against the US dollar each year, a pace that is "not too slow, not too fast".

Yesterday, the country ordered its major lenders to park more cash at the central bank, showing its renewed concern about inflation.

The move came just after China reported its second-largest monthly trade surplus this year, and highlighted the nation's unusual economic position ahead of this week's summit of the Group of 20 major economies in Seoul. China and some other emerging markets are increasingly concerned that their strong economic rebound from last year's global slowdown will result in inflation and asset bubbles, while the US and other developed economies are expanding weakly if at all.

China's reserve requirement ratio for banks will rise by half a percentage point starting next week, the People's Bank of China said in a statement on its website yesterday. That would put the standard ratio for large banks up to 17.5 per cent, though the actual requirement imposed on individual banks can be higher or lower at the central bank's discretion.

"Beijing's policy focus has shifted decisively from concerns about domestic growth and external demand to concerns about inflation pressures and liquidity management," said Brian Jackson, an economist at Royal Bank of Canada. As is its usual practice, the central bank offered no commentary on or explanation of its decision.

- Liu Li and Victoria Ruan contributed to the article.