Chinese Inflation Likely Above 5% in May

The Chinese government has set an inflation target of 4% for the year but it is likely that China’s inflation rate may be above 5% for the month of May. From Market Watch:

China’s inflation will likely be above 5% in May due to rising vegetable prices amid a drought along the Yangtze river, Communist Party mouthpiece People’s Daily reported Saturday in its overseas edition, citing government researchers and academics.

Government data show prices of some major vegetables rose more than 10% in the last week, the paper said. Central China’s worst drought in more than 50 years is drying reservoirs, stalling rice planting, and threatens crippling power shortages as hydroelectric output slows.

Drought and rising food prices are the likely culprits for China’s May inflation rates. From iMarket News:

Surging food prices in May and severe drought conditions in the south of the country are forcing analysts to revise their earlier projections for Chinese inflation, which had been expected to ease soon.

They said that pork prices have also seen a surprising upsurge, casting doubt on forecasts at the start of the year for inflation to peak in the first half before cooling off.

Food prices — which tend to be the swing factor with Chinese inflation trends — were again the culprit, rising 11.5% in the month. The problem isn’t all drought-linked.

A combination of disease and rising feed and transport costs have also cut domestic pork supplies. BOABC estimates that pork prices were 44.4% higher in mid-May than during the same period last year.

Ministry of Commerce data show pork prices have been rising since mid-April. They rose 1.5% last week while egg prices were up 1.3% and those for cabbage surged 23%.

Fears that inflation will affect China’s economic growth have caused Chinese stocks to fall. From Wall Street Journal:

Chinese stocks fell for an eighth consecutive session on concerns that high inflation will drive Beijing into policies that could slow economic growth.

The Shanghai Composite index finished down 0.1%, at 2706.36, an eight-month low.

In Shanghai, property shares fell on the prospect of slowing economic growth and concerns that tight power supplies will cut cement production and drive up prices. Poly Real Estate Group dropped 3.3% and Gemdale gave up 2% in Shanghai, while China Vanke lost 1.3% in Shenzhen.

China’s inflation has also caused the yuan to rise to another record high against the dollar. From Wall Street Journal:

China’s yuan rose to another record high against the U.S. dollar late Monday after the central bank guided the currency higher via a reference exchange rate amid concerns about intensifying inflationary pressures.

The yuan’s strength also comes after the U.S. Treasury Department said Friday that China’s currency remains substantially undervalued but declined to name the nation as a currency manipulator for the second time this year.

On the over-the-counter market, the dollar was at CNY6.4829 at 0830 GMT, down from CNY6.4917 late Friday. It traded between CNY6.4826, the lowest level under the current system, and CNY6.4861.

The previous record high for the yuan was CNY6.4858 to the dollar, set Thursday.

At CNY6.4826 to the dollar, the yuan is up 5.3% against the U.S. unit since June 2010, when China effectively ended its currency’s two-year-long peg to the dollar and vowed to make the yuan more flexible.

May 30, 2011 2:33 PM
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