China's October CPI Forecasted to Rise 4%

By Wei Chengwu and Chen Pingping
Published: 2010-11-10

Economic Observer Online
Translated by Chen Ximeng
Original article:

The EO conducted a survey of professional economists from nine financial institutions; the economists forecast that China's CPI in October will rise by 4 percent and its producer price index (PPI) by 4.9 percent. Economists from Goldman Sachs & Gao Hua Securities, Industrial Securities, UBS Securities, and China Merchants Bank, were among those surveyed; 8 of which expected a 4 percent or higher increase in CPI compared to the 3.6 percent increase during September.

The biggest driver of CPI’s October increase is a jump in food prices.

Industrial Securities’ chief macro analyst pointed out that the cost of pork, eggs, vegetables, and fishery products saw an increase of 8 percent, 11.8 percent, 10.6 percent and 49 percent respectively between September 27 and October 24.

He estimated that the food price index of CPI in October would increase by 10.3 percent based on the level of September with around a 4 percent rise of CPI.

Citing the CPI for non-food items, Song Yu, an economist with Goldman Sachs & Gao Hua Securities pointed out that the CPI for non-food items in September showed a positive growth after successive negative growth from June to August compared to the same period last year.

CPI in September rose to a 23-month year-on-year high and the possible rise of 4 percent or more in October is expected to increase inflationary pressure.

Song believes people are concerned with the continued increase of currency and credit under the circumstances of the rapid rise of the inflation rate and powerful economic growth.

Although the government has given signals that it is tightening its monetary position in terms of the raising the deposit reserve ratio and increasing interest rates, these moves are insufficient and inflation hazards will continue added Song. 

Lu Zhengwei, Industrial Bank Chief Economist believed that the markets’ initial reaction to the interest rate increase by China's central bank was to believe that the central bank would not increase the interest rate again this year. However if China’s CPI does reach our estimated rise of 4 percent, the market may expect the interest rate to be increased once more.

At least 2 more rises of 0.25 percent in the interest rate would be needed in order to amend the interest rate, said Lu. 

People should pay attention to the second round of quantitative easing in the US. Wang Tao, a UBS Securities economist, was concerned that quantitative easing will accelerate the inflow of outside capital, further increasing inflationary pressure in China. He believes China’s reserve requirement ratio will rise to 3.25 by the end of 2011 as the government tries to progressively normalize interest rates and ease inflationary pressures.

This article was edited by Rose Scobie