Interpac Business and Migration Solutions Melbourne Australia

(March 28, 2011)

China's annual inflation will probably top 6 percent around the middle of 2011 before losing steam in the second half of the year, the Bank of Communications (3328.HK) said on Thursday. Key drivers of domestic inflation were soaring food prices, rising production and labour costs, fuelled by the abundant banking liquidity, the bank said in a research report.

China will have to cope with rising imported inflation due to soaring global commodity prices on the back of the dollar's weakness, said the bank, China's fifth-largest lender.

"China faces relatively big pressures on prices in 2011, especially in the first half. There are many factors driving up prices and inflation risks cannot be ignored," it said.

Full-year inflation could be around 4.5 percent, with the annual rate topping 6 percent in some months, it said.

China's annual inflation in December eased to 4.6 percent from November's 28-month high of 5.1 percent, but many economists think the pull-back is temporary due to rising food costs.

The bank expects China's foreign exchange reserves, already the world's largest, to top $3.2 trillion by the end of 2011 from $2.85 trillion last year, driven by the trade surplus, foreign investment and short-term money inflows.

The yuan CNY=CFXS is likely to rise 5-7 percent against the dollar as the government tolerates fast currency gains to curb imported price rises, the bank said.

Banks would probably lend 7-7.5 trillion yuan in new loans in 2011, down from last year's 7.95 trillion yuan, it said.

On the policy front, the central bank would probably raise the benchmark interest rate by 2-3 times, each at 25 basis points, and raise banks' reserve requirements four times, each at 50 basis points, it said.

On top of that, the central bank will implement the "differentiated" reserve requirement ratio system to punish banks found lending too aggressively, it said. ($1=6.581 Yuan)

(Source: Reuters.com)