* China reflating largely due to heavy industry,
* Surging China prices adding to stronger global inflation
* Some analysts warn speculation in commodities may be
* Dec producer prices +5.5 pct y/y, fastest growth since
* Dec consumer prices +2.1 pct
(adds analyst's comment, detail)
By Elias Glenn
BEIJING, Jan 10 China's producer prices surged
the most in more than five years in December and by more than
expected as prices of coal and other raw materials soared,
adding to expectations that global inflation may be stronger in
The pick-up in prices reinforces views that the world's
second-largest economy is on steadier footing heading into the
new year, underpinned by stronger factory activity and domestic
demand which is being driven by a lending and construction boom.
But some analysts worry the strong gains in producer prices
may also be fueled by growing speculation in commodities futures
markets, adding to the broader risk of bubbles in China's
economy even as leaders attempt to control explosive growth in
"I don't think there's an inflation issue in China, it's an
asset bubble," said Commerzbank senior emerging market economist
Zhou Hao in Singapore.
The producer price index (PPI) jumped 5.5 percent in
December from a year earlier, the most since September 2011,
compared with a 3.3 percent increase in November, the National
Statistics Bureau said on Tuesday.
That is boosting profits for China's heavily indebted
smokestack industries, which are largely state owned, and
generating more cash flow to help pay off their loans.
Analysts had expected a 4.5 percent gain, a Reuters poll
Reflecting surging demand for building supplies and coal for
both heating and steelmaking, and government-mandated cuts in
excess industrial capacity, raw materials and mining prices
continued to show the fastest gains, rising 9.8 percent and 21.1
The statistics bureau said volatility in exchange rates was
one reason for the increase in producer prices, as commodity
imports became more expensive.
The yuan weakened 6.5 percent against the dollar last year,
its worst performance since 1994.
Consumer inflation rose 2.1 percent on-year, missing
expectations, as food prices rose at a more modest 2.4 percent
GLOBAL REFLATION, HIGHER INTEREST RATES?
For the first time in nearly five years, economists at HSBC
have raised their forecast for global growth and inflation over
the next two years based on robust manufacturing activity, a
resilient China and above all the fiscal boost expected to come
in the United States under incoming President Donald Trump.
Hopes of stronger spending under Trump are sparking
expectations of stronger U.S. economic growth and inflation
which more interest rate hikes from the Federal Reserve.
China's sustained producer price jump has not yet started
filtering into consumer prices, suggesting its central bank
will not be under pressure to tighten monetary policy as soon,
But policy insiders already expect a tilt towards more
conservative monetary policy this year as top leaders struggle
to strike a balance between supporting the economy with ample
credit and preventing a destabilising build-up in debt.
Commerzbank's Zhou said that a bubble in commodities, led by
coal and steel prices, could complicate policy decisions if
economic growth slows and some easing of monetary conditions is
The PBOC reaffirmed it would keep liquidity in the financial
system stable while taking steps to prevent asset bubbles and
financial risks in its annual work meeting for 2017.
Capital Economics expects consumer price inflation to pick
up this month, in part because Lunar New Year falls in late
January, earlier than in 2016, but it said the price rebound
could be short-lived.
"We think the pick-up (in inflation) will mainly be driven
by movements in commodity prices and is unlikely to be
sustained," Capital Economics economist Chang Liu said in note.
The government think tank, the China Academy of Social
Sciences (CASS), forecast that the country's CPI would grow 2.2
percent in 2017 and PPI would rise 1.6 percent for the year.
For 2016, CPI rose 2.0 percent while PPI slid 1.4 percent.
(Reporting by Elias Glenn; Editing by Kim Coghill)