China’s economy slows slightly; inflation hits 32-month high

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China’s hard-charging economy tapered slightly in the first quarter, but inflation rose to a 32-month high despite nationwide efforts to rein in consumer prices, the country’s National Bureau of Statistics said Friday.

China’s gross domestic product grew by 9.7% in the first quarter compared with the same period a year ago, down from the 9.8% expansion recorded in the fourth quarter of 2010.

Meanwhile, China’s consumer price index soared to 5.4% in March from a year ago, intensifying pressure on the government, which fears rising prices could lead to social instability.

At a meeting Wednesday of the State Council, the country’s Cabinet, Chinese Premier Wen Jiabao blamed deficits overseas and volatile global commodity prices for complicating China’s economy.

‘The exchange rates of major international currencies fluctuated wildly, and prices of food, oil and other commodities kept increasing on global markets, spreading inflationary pressure from emerging markets to developed economies,’ Wen said while also vowing to rein in consumer prices.

The increase in inflation comes even after policymakers raised interest rates four times and banks’ reserve ratio requirements six times since October to sop up excess liquidity produced by China’s record lending beginning in 2009.

‘Despite the most aggressive period of tightening in years, the government cannot seem to slow the economy down,’ wrote IHS Global Insight economists Alistair Thornton and Xianfang Ren in a note to clients Friday.

‘Beijing has had to regularly revert to heavy-handed administrative measures, such as direct price controls in the food sector and limits on house purchases in the property market, in order to contain inflationary pressure,’ the economists said. ‘With inflation expectations still running high and prices at disconcerting levels, the government will need to press on with its tightening schedule. Expect to see more movement on reserve ratio requirements, probably one more interest rate hike and a slightly faster [yuan] appreciation.’

At around 6.53 to the dollar, the Chinese currency has risen 4.5% since Beijing ended its fixed peg to the greenback in June.

-- David Pierson