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China will step up efforts to fight inflation next year after prices rose more than 5 per cent in November, according to a statement released after an annual economic policy meeting in Beijing.
The 5.1 per cent rise in the consumer price index in November was higher than expected, and up from 4.4 per cent in October. It is also well above the government's 3 per cent inflation target and will increase pressure on the authorities to raise interest rates and further rein in the huge monetary stimulus of the past two years.
State media said on Sunday, at the end of a three-day conference to set economic policy for 2011, that the government's goal would be to battle inflation without jeopardising growth.
"The priority is to actively and properly handle the relationship between steady and relatively fast economic growth, economic restructuring and managing inflation expectations," state radio reported.
"Strategic economic restructuring will be accelerated and stabilising price levels will be given a more prominent position."
State media also reported that conference had reiterated that Chinese currency policy would remain basically stable next year. China remains under heavy international pressure to allow the renminbi to appreciate.
The annual economic meeting chaired by Hu Jintao, China's president, reaffirmed a shift to a "prudent" monetary policy from the previous "appropriately loose" stance. The shift was announced by the Chinese Communist party's ruling body last week, raising expectations for an imminent increase in interest rates. The central bank raised reserve requirements for commercial banks on Friday -- for the fifth time this year and the third in just over a month -- to drain liquidity from the financial system.
The weekend's inflation data, combined with a renewed surge in fixed asset investment and exports, will fuel concerns that the economy is overheating.
The biggest contributor to rising inflation was food prices, which increased 11.7 per cent year-on-year, against 10.1 per cent in October. Non-food inflation also rose from 1.6 per cent in October to 1.9 per cent.
According to Qian Wang at JPMorgan in Hong Kong, strong fiscal spending "coupled with the still accommodative monetary environment?.?.?.?and low interest rates raise the risk of overheating by early next year".
Andy Rothman, at CLSA in Shanghai, warned that the inflation rise was mainly the result of bad weather, which has raised the price of vegetables. Although interest rates might rise 0.25 per cent by year-end, he did not predict a significant tightening next year.
Instead, the increase in factory-gate inflation would lead to lower corporate profits as companies found their margins squeezed. "Overcapacity and strong competition leaves few firms with the ability to fully pass these higher costs on to final goods prices," he said.
Mr Rothman noted that "the Chinese consumer remained confident last month, with nominal retail sales rising 18.7 per cent year-on-year, up from 18.6 per cent year-on-year in October."
The government said on Friday that exports increased 34.9 per cent year-on-year in November, while imports surged 37.7 per cent. It said on Saturday that the rate of growth in industrial production increased slightly to 13.3 per cent last month. Fixed asset investment also accelerated from 24.4 per cent in the January to October period, compared to the same period the year before, to 24.9 per cent for January to November.
