VINACHEM

China's inflation held above 5percent in April and lending exceeded analysts’ estimates,signaling that further monetary tightening may be needed to coolthe fastest-growing major economy.

Consumer prices rose 5.3 percent from a year earlier andbanks extended 740 billion yuan ($114 billion) of local-currencyloans, according to reports from the statistics bureau andcentral bank. Weaker industrial-output growth, also reportedtoday, may diminish price pressures in coming months.

Today’s data showed that inflation has exceeded Premier Wen Jiabao’s 4 percent target each month this year. The figuresmay buttress the case made by U.S. Treasury Secretary Timothy F.Geithner in annual bilateral talks in Washington thisweek that China needs a stronger yuan to contain prices and spurdomestic demand.

“Inflation is too high and will keep the policy bias infavor of more action over the next few months -- we expectanother two rate hikes and further yuan appreciation against thedollar,” said Brian Jackson, an emerging markets strategist atRoyal Bank of Canada.

The Shanghai Composite Index rose 0.1 percent as of the11:30 a.m. local time break in trading. Non-deliverable yuanforwards indicated the currency may gain about 2.4 percentagainst the dollar in the next 12 months from a rate of 6.4926.

Investment Surges

Inflation compared with the 5.2 percent median forecast ina Bloomberg News survey of 30 economists and an almost three-year high of 5.4 percent in March. Output growth slowed to 13.4percent, the least since November, and a 17.1 percent expansionin retail sales was below economists’ median 17.6 percentestimate.

Today’s report showed a 25.4 percent increase in fixed-asset investment in the first four months of the year. Thatfigure, combined with a report yesterday showing record exportshipments in April, indicates the world’s second-biggest economyhas made limited progress in shifting to a growth model moredriven by domestic demand.

“The data looks bad,” said Dariusz Kowalczyk, senioreconomist at Credit Agricole CIB in Hong Kong. “The economy isslowing more sharply than expected but inflation is not.”

Bank of America Merrill Lynch called the numbers “mixed,”saying that power shortages and, to a lesser extent, disruptionsfrom Japan’s earthquake may have limited industrial output. HongKong-based economist Lu Ting said policy makers can controlinflation without causing an economic “hard landing.”

Producer Prices

In an encouraging sign for Chinese officials, producerprices increased 6.8 percent, less than economists’ medianforecast and also below the 7.3 percent rate in March. Inaddition, growth in M2 money supply slowed to 15.3 percent.

Economists’ median forecast is for one more interest-rateincrease this year, adding to four since mid-October, as a dipin commodity costs and more favorable bases for comparison helpto limit price gains in the second half.

Officials have raised banks’ reserve requirements, reinedin credit growth from the record levels of 2009 and 2010,restricted home purchases, and said this month that consumergoods company Unilever will be fined 2 million yuan ($300,000)for telling the media that it planned to raise prices.

Inflation is “the most pressing problem” facing China,Vice Premier Wang Qishan said at the Washington talks.

Commodity Rout

Commodities had their biggest weekly decline since December2008 last week, aiding the campaign to tame inflation bytrimming the nation’s import bill.

The median forecast in a Bloomberg News survey of analystsis for the benchmark one-year lending rate to rise by a quarterpercentage point to 6.56 percent by the end of the year. ThePeople’s Bank of China let the yuan gain 0.9 percent against thedollar in April, the fastest pace of appreciation this year.

“With economic growth stabilizing, policy makers signalingthey are willing to tolerate faster currency appreciation, andglobal food prices stalling, inflation appears on course todecline over the second half of the year,” Wang Qinwei, aLondon-based economist with Capital Economics, said beforetoday’s data.

Deutsche Bank AG estimates the yuan may appreciate at anannualized pace of 7 percent to 10 percent against the dollarover the next two months to reduce import costs before gainsslow in the second half as inflation drops “sharply.”