article from DBS

China Inflation Quickens to 10-Year-High 6.5 Percent

Sept. 11 (Bloomberg) -- China's inflation rate surged to a 10-year high
and the trade surplus widened, adding pressure on the central bank to
raise borrowing costs for a fifth time since March.

Consumer prices rose 6.5 percent in August from a year earlier after
gaining 5.6 percent in July, the statistics bureau said today. The trade
gap widened 33 percent to $24.97 billion, the second-highest monthly
total.

Food costs drove the increase in inflation, jumping 18.2 percent after a
shortage of pigs pushed up meat and poultry prices. The government is
trying to stop the money from record exports stoking wider price gains
and property and stock bubbles in the world's fastest-growing major
economy.

``Inflation expectations have begun to rise and the government should do
something significant like raising interest rates by 54 basis points to
signal they are serious,'' said Jim Walker, chief economist at CLSA
Asia-Pacific Markets in Hong Kong. ``Otherwise, the stock and property
bubbles will get bigger and eventually crash.''

China's currency, the yuan, was little changed at 7.5228 against the
dollar as of 12:40 p.m. in Shanghai, from yesterday's 7.5214, the
strongest close since a fixed exchange rate was scrapped in July 2005.
The benchmark CSI 300 Index of stocks fell 0.4 percent.

Central Bank Target

The yield on the 10-year treasury rose 7 basis points to 4.35 percent,
according to the China Interbank Market. The price of the security due
June 2017 was 100.4 yuan.

Inflation topped the 5.9 percent median estimate of 24 economists
surveyed by Bloomberg News. The trade surplus compared with an estimate
of $25.9 billion.

The central bank raised the benchmark one-year interest rate by 0.18
percentage point to a nine-year high of 7.02 percent last month. It's
also sold bills and ordered lenders to set aside a larger proportion of
deposits seven times this year to soak up cash.

The world's fourth-biggest economy expanded 11.9 percent in the second
quarter, the largest increase in more than 12 years.

Exports rose 22.7 percent in August from a year earlier and imports
gained 20.1 percent. The $15 billion trade surplus with the U.S. for the
month may exacerbate friction over product safety and lawmakers'
claims the yuan is undervalued.

Inflation has exceeded the central bank's annual target of 3 percent for
four straight months. The average rate for the first eight months was
3.9 percent.

Property, Stocks

Consumer-price gains have outpaced returns on bank deposits, encouraging
households to switch money to property and stocks. The benchmark
one-year deposit rate is 3.6 percent.

The CSI 300 has climbed more than 160 percent this year amid government
warnings of a bubble. In July, housing prices jumped 7.5 percent in 70
major cities.

Meat and poultry prices soared 49 percent in August after climbing
45.2 percent in July. Vegetable costs rose 22.5 percent after gaining
18.7 percent. The increase in non-food inflation stayed at 0.9 percent.

In the southern factory town of Tanzhou, food vendors have put up signs
saying ``Higher Inflation'' on their street stalls to explain the
prices.

``Everything costs more -- chili, cooking oil and meat,'' said Luo
Aiqun, a 42-year-old woman selling spicy meat, vegetables and noodles.
``My customers complain -- but I have no choice.'' Luo charges 4.5 yuan
(60 cents) for a meal, up from 4 yuan last month, she said.

China is the world's biggest producer and consumer of pork. Prices have
soared because of a pig shortage linked to disease and increased feed
costs. Food accounts for a third of the consumer price index and meat
for 7 percent.

Pork Imports

The government has added subsidies for farmers this year and arranged to
import pork. Smithfield Foods Inc., the Smithfield, Virginia-based
company that's the world's biggest hog and pork producer, agreed last
month to export 60 million pounds of meat to China.

``Replenishing the hog supply will take time,'' said Carl Weinberg,
chief economist at High Frequency Economics in New York. ``This is a
political problem that is likely to surface as a criticism of the
government at the National Congress.''

Soaring consumer prices were a factor in protests that led to the
Tiananmen Square crackdown in 1989. China's leaders are competing for
jobs before the Communist Party's 17th National Congress beginning Oct.
15.