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Inflation 'set to increase further'

China Daily, May 12, 2011

According to NBS statistics released on Tuesday, industrial output increased by 13.4 percent year-on-year in April, 1.4 percentage points lower than in March.

"The decline shows that the previous tightening has taken effect and policies should get more flexible in the coming months to avoid a hard-landing," said Dong Xian'an, chief economist at Peking First Advisory, a Beijing-based research institution. "I would not say that there won't be interest rate hikes, but they may come in the third or fourth quarter," he said.

Inflationary pressure has eased, he said, despite the high CPI figure. The annualized month-on-month CPI growth, which better reflects the current inflationary situation, was about 10 percent in November, but has dropped to below 4 percent in April, he said.

"I don't think there will be more interest rates hikes this month, but the reserve requirement ratio for banks (the proportion of money lenders must keep as reserves) may be raised," said Lu from Industrial Bank.

Chang of Barclays Capital also said he believed the government needs to avoid excessive tightening, which could lead to a hard-landing.

The People's Bank of China, the central bank, has raised the reserve requirements for banks four times and benchmark interest rates twice since the beginning of this year to soak up excessive liquidity and control inflation.

Food prices in April, which account for about 30 percent of the CPI basket, went up year-on-year by 11.5 percent, roughly the same as in March.

Vegetable prices slumped by 11.2 percent month-on-month, due to sufficient supply, according to the statistics bureau.

Prices could further decline in the second half of this year as "imported inflation" weakens, analysts said.