Strong demand pushes up industrial prices
By Xu Dashan (China Daily)
Updated: 2004-03-25 08:46

The ex-factory price of China's industrial products, a guide to the trend of consumer prices, rose 3.5 per cent in February compared with the same month of last year, the National Bureau of Statistics said yesterday.

The ex-factory price, which is measured at the factory gate, remained at the same level as that in January.

But it rose significantly from the 1.9 per cent growth recorded in November and 1.2 per cent in October, propelled by soaring costs of raw materials.

Prices of steel products rose between 19.7 per cent and 36.7 per cent in February compared with the same month of last year, and coal prices rose a year-on-year 8.7 per cent, spurred by strong demand.

Alumina prices surged 22.5 per cent in the month, while copper prices jumped 18.1 per cent and zinc prices rose 15.1 per cent, the bureau said.

Qi Jingmei, a senior economist with the State Information Centre, said the higher price was mainly due to the strong demand spurred by the fast fixed asset investment and industrial output.

China's fixed asset investment grew a year-on-year 53 per cent, and industrial output rose a year-on-year 16.6 per cent during the first two months.

The ex-factory prices of industrial products, as well as purchasing prices for raw materials, fuel and energy are important indicators for the consumer price index (CPI), the key inflation measurement for Chinese policy-makers, Qi said.

"More or less, the higher production prices will translate into higher consumer prices," she said.

China's CPI rose a year-on-year 2.1 per cent in February, 3.2 per cent in January and December.

Zhu Jianfang at China Securities said CPI would maintain a relatively high level from March on.

Higher CPI rates increase worries for both government officials and economists, who fear the country's economy might overheat.

People's Bank of China's Governor Zhou Xiaochuan said the government should be on the alert for possible inflation.

Researcher Wang Zhao of the State Council's Development Research Centre said there are already some early signs of inflation.

Zhu said if CPI continues to stay at the 3 per cent level or higher in the coming months, there will be a possibility of raising interest rates.

Song Guoqing, a professor at Peking University, said the government should have already raised interest rates to deal with the increasing inflationary pressure.

"If people feel the trend of price rises, they will rush to buy more goods," he said.

The panic purchasing will push the commodity price rise further and then inflation will occur, meaning the government must adjust interest rates in a timely manner, he said.

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

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

The lower interest rate will also have an impact on people's consumption behavior, he said.

People will borrow money from banks to buy larger items like houses to wait for further price rises to make profits.

This would stimulate demand, which in turn fuels inflation, he said.

The lower interest rate would also stimulate investment, some areas of which are considered overheated, Song said.

But Zhou Xiaochuan said the government would not raise the yuan interest rate this month, because inflation was still mild.

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