By Dong Zhixin (chinadaily.com.cn)
Updated: 2007-11-13 10:36

Consumer inflation in China rebounded to its highest level in 11 years on rising food prices, official figures released on Tuesday showed, increasing the possibility for the sixth interest rate hike this year.

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The Consumer Price Index (CPI) rose 6.5 percent in October from a year earlier, the National Bureau of Statistics said in a statement on its website. The gauge eased to 6.2 percent in September from 6.5 percent in August.

Food prices were the biggest driver of the accelerating inflation, jumping 17.6 percent. Nonfood items posted an increase of 1.1 percent.

The CPI increase for the first 10 months was 4.4 percent from the same period last year, above the official target of three percent. For the whole of 2007, the figure might be around 4.5 percent, the People’s Bank of China (PBOC) said in a report last week.

Another indicator of inflation, the Producer Price Index (PPI) increased 3.2 percent in October from the same period last year, the fastest growth in nine months, the NBS said on Monday.

That indicated a spillover of price pressure from the food sector to other areas of the economy, according to analysts.

The accelerating inflation might force the central bank to raise the interest rates for the sixth time this year. The latest rate hike happened on September 15, when the one-year savings rate rose to 3.87 percent.

However, the rate of return from bank deposits is still less than the inflation rate, suggesting an erosion of purchasing power for consumers. That sparked an exodus of money from banks to the stock market, whose index has almost doubled so far this year, even after a major correction in the past month.

Another factor that added to the pressure of another interest rate increase was the runaway growth in money supply and bank loans.

In October, the country's broad measure of money supply, or M2, increased by 18.5 percent, while the banks offered 136.1 billion yuan in new renminbi loans.

In theory, a rate hike could help curb the demand for loans as it increases the cost of capital, and in turn reduce the money supply.

The rapid increase in money supply is due in part to the surging trade surplus, which forced the PBOC to issue more yuan to buy the foreign currency.

China's trade surplus in October jumped to an all-time high of US$27.05 billion, the General Administration of Customs said on Monday, bringing the total in the first 10 months to $212.37 billion. The previous monthly record of $26.9 billion was set in June.

To mop up the liquidity, the central bank announced during the weekend the commercial banks must put 13.5 percent of their deposits in the PBOC as reserves. That marked the highest level ever and the ninth increase this year.

The ratio might reach 15 percent in 2008, the Industrial and Commercial Bank of China (ICBC) said in a recent report.

In addition to increasing the liquidity pressure, the booming trade surplus also gave more ammunition to other countries demanding faster appreciation of the Chinese currency.

The European financial ministers urged China to allow the yuan value to rise faster in a meeting on Monday in Brussels, earlier reports said. They would raise the case during the European Union-China Summit in Beijing scheduled for November 28.