* China reflating largely due to heavy industry, construction boom
* Surging China prices adding to stronger global inflation view
* Some analysts warn speculation in commodities may be building
* Dec producer prices +5.5 pct y/y, fastest growth since Sept 2011
* Dec consumer prices +2.1 pct (adds analyst’s comment, detail)
By Elias Glenn
BEIJING, Jan 10 (Reuters) - 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 2017.
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 debt.
“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 showed.
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 percent, respectively.
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 pace.
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, analysts say.
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 needed.
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)