China’s inflation accelerated at the fastest pace in more than two years in May as pork prices soared, increasing the likelihood that interest rates will be raised.
Consumer prices rose 3.4% from a year earlier, the National Bureau of Statistics said on Tuesday. That was more than the 3.3% expected by economists. April’s inflation rate was 3%, matching the central bank’s 2007 target.
Meat prices surged 26.5%, helping push inflation above the target and adding to concern that the world’s fastest-growing major economy may overheat. Inflation is outpacing returns on bank deposits, encouraging households to put money into a stock market that the government is trying to cool. “Today’s number and the stock market for the past few days make a stronger case for a rate hike,” said Wang Qing, chief China economist at Morgan Stanley in Hong Kong.
Household deposits fell by 278.4 billion yuan ($36.4 billion) in May, the central bank said on Tuesday. That adds to evidence that individuals are shifting money into the stock market from banks. Yuan deposits dropped 167.4 billion yuan in April, the first decline since February 2003.
The CSI 300 Index of stocks rose 2.7%, taking its gains for the year to 98%. The yield on the benchmark 10-year government bond rose 7 basis points to close at 4.14% in Shanghai.
The benchmark stock index has gained 15% in six days, rebounding from a rout prompted by the government’s decision to triple the tax on share trades on 30 May.
“The stock market is like the place for legal gambling in China,” said Jim Walker, chief economist at CLSA Asia-Pacific Markets in Hong Kong. “It’s getting dangerous now, with so many people speculating on it that a collapse could lead to social problems.”
Record trade surpluses are pumping the financial system full of cash, fueling economic growth of 11.1% in the first quarter.
M2, the broadest measure of money supply, rose 16.7% in May after a 17.1% increase in April, staying above the central bank’s 16% target for a fourth month.
The May trade surplus rose 73% from a year earlier to $22.45 billion. The People’s Bank of China has ordered banks to set aside larger reserves and sold bills to try to rein in the money supply.
The central bank is “closely” watching rising food costs and will study the inflation data before any interest-rate change, governor, Zhou Xiaochuan, said on 5 June.
Food prices climbed 8.3% after increasing 7.1% in the previous month, while prices of consumer goods jumped 3.9% after rising 3.4%. Non-food inflation was unchanged at 1%.
“According to economic theory, deposit rates need to ensure returns for depositors, so if the consumer price index surpasses bank deposit rates, I think it’s reasonable to raise interest rates,” Zhou Wangjun, the government’s deputy director of consumer prices, said in a webcast on Tuesday. BLOOMBERG
Bernard Lo and Catherine Yang in Hong Kong, Jianguo Jiang in Shanghai and Christina Soon and Zhang Dingmin in Beijing contributed to this story.