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REUTERS, BEIJING - China's consumer price inflation clung near a 12-year high in April, and authorities quickly reacted by raising the amount of money banks must keep in reserve, sticking to a tight policy despite weakening global growth.
For authorities who have insisted their priority is to tackle price rises, the quickening of annual inflation to 8.5 percent from 8.3 percent in March will be frustrating, while there is also a glimmer of optimism.
"This isn't something the government will necessarily panic about, particularly as food prices are now beginning to fall," said Paul Cavey, economist at Macquarie Securities in Hong Kong.
Apart from February's reading of 8.7 percent, inflation was last higher in May 1996.
"Greater prominence needs to be given to curbing inflation and controlling price rises," the National Bureau of Statistics said in a statement accompanying the inflation data.
Authorities reacted almost immediately, raising the amount that banks must hold in reserve to a record 16.5 percent, the fourth such increase this year.
"The reserve ratio hike after the inflation data is earlier than expected, suggesting the central bank doesn't want liquidity returning to very ample conditions," said Shi Lei, an analyst at Bank of China.
Worries about the pick-up in inflation were eclipsed on Monday when an earthquake with a magnitude of 7.8 struck China's heavily populated Sichuan province.
Reports of damage were sketchy but already some analysts suggested the fallout could complicate the government's economic management.
"If prices keep rising after the disaster, the central bank will face continued heavy pressure in fighting inflation," said Jiang Chao, an analyst with Guotai Junan Securities in Shanghai.
Food prices, which make up a third of the consumer basket, have been the overwhelming driver of inflation, though there are concerns they might spill over to more sectors if people take ever-rising costs as a given.
Food prices rose 22.1 percent in April from a year earlier, but weekly government reports on fresh food prices have showed a slight dip in May.
Non-food prices rose 1.8 percent in April from a year earlier, the same as in March.
FOCUS ON INFLATION
Zhou Xiaochuan, China's central bank governor, said on Saturday that the country would give precedence to tackling inflation over targeting growth or employment.
Even as easing food prices give some grounds for hope, pipeline pressures have built up with the producer price index, or factory-gate inflation, hitting a three-and-a-half year high of 8.1 percent in April.
"As underlying inflationary pressures remain undiminished, it is vital for the government to keep its tightening policy stance to anchor inflationary expectations," Hong Liang and Yu Song, Goldman Sachs economists in Hong Kong, said in a client note.
The government declared it would tighten monetary policy this year to fight inflation, but it has yet to raise interest rates after six increases in 2007.
Instead, it has drawn on an array of tools, from bank lending curbs to faster yuan appreciation -- the central bank on Monday set the highest daily reference rate for the yuan, 6.8920 per dollar, since it ended a fixed peg to the US currency in July 2005.
A torrent of money has gushed into China from record trade surpluses, threatening to push inflation still higher, but the latest trade data, also published on Monday, showed the global downturn was offering it a respite.
China recorded a trade surplus of $16.7 billion in April, fractionally lower than the same month last year, though the slowdown was sharper in local currency terms.
Imports grew faster than exports, as they have done every month since October, apart from March.
"The rest of the world is slowing and of course it should be reflected in China's export growth. This should help China's economy cool off," Qing Wang, Morgan Stanley economist in Hong Kong, said.
The 8.5 percent inflation reading was in line with a Reuters report last Thursday based on information from sources familiar with the data. Economists had expected a rate of 8.3 percent.
The government set a target of 4.8 percent for average inflation in 2008, but in recent weeks a series of officials have said the real number would very likely top that.
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