Chinese Inflation Expectations Climbing

In spite of the economic recovery, China is still haunted by the upward inflation expectations.

Inflation expectations are rising in China, making it more difficult for Premier Wen Jiabao to meet his 3 percent full-year price target and adding to the case for an interest-rate increase.

The number of Chinese households expecting prices to gain in the next three months increased in a quarterly survey conducted in February, the central bank said on its Web site today, citing seasonally adjusted data. It didn’t give numbers.

“Inflation expectations will continue to worsen,” said Ben Simpfendorfer, Hong Kong-based chief China economist at Royal Bank of Scotland Group Plc. He cited rising home prices and wage inflation and said the central bank may increase rates in the second quarter.

The seasonally adjusted increase compared with a decline in the unadjusted inflation-expectations index to 66 percent from 73 percent in the previous quarter, the report shows. The survey is of 20,000 households in 50 cities, the central bank said on its web site previously.

Contrasting View

In contrast with Royal Bank of Scotland’s view, London- based Capital Economics Ltd. focused on the unadjusted index as evidence that “price pressures have weakened since the start of the year.”

The unadjusted index climbed throughout last year, the People’s Bank of China said previously.

Chinese officials assessing when to end stimulus measures are balancing asset-bubble and inflation risks against concern that a “double dip” global slump remains possible. The world is counting on China to be an engine of growth as unemployment restrains the recovery in the U.S. and Europe grapples with the Greek debt crisis.

More than 70 percent of Chinese households consider home prices unacceptably high, a proportion that has climbed for four quarters, the central bank said. About 51 percent of households had the same view of consumer prices, the most since the survey started in 1999.

Switch From Deflation

China reported full-year deflation in 2009. February’s consumer price gain of 2.7 percent, the biggest increase in 16 months, was swelled by a weeklong holiday that fuels spending and cost increases.

“The current price and interest-rate levels have led to a notable decline in urban residents’ willingness to spend, especially since the second quarter of 2009,” the central bank said. About 15 percent of households prefer to spend, compared with 44 percent who favor saving and 41 percent who favor investment in bonds, funds and stocks, according to the survey.

China’s economy expanded 10.7 percent last quarter, the fastest since 2007, adding to concern that it could overheat. Since October, Wen has stressed that managing inflation expectations is a top priority.

The government has tightened mortgage lending for second homes and banks have scaled back from favorable home loan rates in an effort to curb property speculation and excessive price gains. Property prices in 70 Chinese cities jumped the most in almost two years last month, led by southern cities of Sanya and Guangzhou. Still, growth in sales by area slowed, a sign that measures to cool the market are having an effect.

The People’s Bank of China has asked lenders to set aside more deposits as reserves twice this year to curb liquidity while leaving benchmark interest rates unchanged. Morgan Stanley said this week that another increase in the requirements may be “imminent” and rates may rise in April.