China's consumer prices rose by 4.4 percent in May compared with the same month last year, the fastest pace in seven years.

 

The consumer price index (CPI), policy-makers' key inflation gauge, rose a year-on-year 3.9 percent in urban areas but 5.2 percent in the countryside, the National Bureau of Statistics said on Friday.

 

In a separate report, the bureau said the country's retail sales rose by an annual 17.8 percent in May, up sharply from April's 13.2 percent.

 

Sales in January to May were up by 12.5 percent from the same period a year earlier.

 

Qi Jingmei, a senior economist with the State Information Center, says the fast growth in retail sales is good news, because the government wanted to cool down investment but increase consumption.

 

And a higher CPI does not necessarily mean the country is facing greater inflationary pressure.

 

"The higher CPI in May is partly due to a low base effect from a year earlier, when the SARS outbreak dampened spending and hit prices," Qi said.

 

In fact, consumer prices in May dropped by 0.1 percent compared with the previous month.

 

Other figures in May also suggested that the central government's measures to cool down the economy had taken effect, Qi said.

 

The growth in both industrial output and money supply dropped by 1.6 percentage points in May compared with the previous month, she said.

 

China has taken a raft of measures since last year to try to cool down the economy, including raising bank reserve requirements three times and curbing unwanted fixed asset investment projects.

 

The latest moves to cool growth have included the issuing of tighter restrictions on new projects in "over-invested" industries like property and steel, and ordering banks to keep more money in reserve instead of lending it out.

 

However, the possibility still exists that the central bank may raise the renminbi interest rate in the coming months, Qi said.

 

People's Bank of China Governor Zhou Xiaochuan said the central bank will follow the CPI movement closely.

 

If the inflation rate keeps going up, leading to an actual negative lending rate, the central bank would consider raising lending interest rates from the current 5.3 percent, he said.

 

"If the CPI growth caused a negative lending rate, which enables corporations to make money even after they pay back the principle and interest, the central bank will consider raising interest rates," Zhou said.

 

A negative lending rate would enable corporations to store raw material and push inflation higher, he said.

 

Zhu Jianfang, an economist at China Securities, said the CPI would maintain a relatively high level starting from the second quarter.

 

"If the CPI continues to stay at the 3 percent level or higher in the coming months, there would be the possibility of interest rates being raised," he said.

 

Yuan Gangming, a senior economist with the Chinese Academy of Social Sciences, said the government should have already increased the interest rate to deal with the growing inflationary pressure.

 

"The government should adjust the interest rate in a timely fashion," he said.

 

Presently, the benchmark one-year bank deposit rate is set at 1.98 percent.

 

People are losing out when they save their money in banks because of low interest rates, Yuan said.

 

The lower interest rate also has an impact on consumer behavior, he said.

 

(China Daily June 12, 2004)