Chinese central bank says inflationary risk remains high in first half of 2008

BEIJING, Feb. 23 (Xinhua) -- China's central bank, the People's Bank of China, said on Friday that price levels will remain high throughout the first half of the year as the nation is facing an "increasing" risk of inflation.

The bank said in its monetary policy report for the fourth quarter that structural supply shortfalls and rising international prices would hold domestic price levels at a high level for a while.

Growth of the consumer price index (CPI), a barometer of inflation, surged to an 11-year high of 7.1 percent last month as snowstorms cut transportation and power, and pushed up food and energy prices.

Analysts said although raw agriculture prices went up substantially last month, it normally takes one or two months for the pressure to pass through to manufactured and processed food items, which will add pressure to inflation in the following months.

Food price rises may in turn spill over to other sectors, pushing up prices of other products and labor costs.

Since the snowstorms happened in mid January, much of the inflationary impact of the natural disasters will be reflected in February, said Ma Jun, chief economist of Deutsche Bank, Greater China.

"The underlying inflationary pressure is even stronger than the January headline number is suggesting, and CPI inflation will likely make two more new highs to reach 7.8 percent in February and 8 percent in March," he said.

The adverse weather may have disrupted the supply chain of some products, which will take quite some time to recover, but as supply recovers and macroeconomic policies are put in place, the pressure will ease in the second half of the year, said Sun Lijian, an economist with Shanghai Fudan University, as quoted by Saturday's China Daily.

With a view to cushioning the impact of international commodity price rises, the central bank said it would further use more flexible exchange rate to reduce inflationary pressure.

Analysts said it could mean that the bank would allow quickened appreciation of the yuan.

The Chinese currency recorded a new high on Wednesday, with a central parity rate of 7.1452 yuan against one U.S. dollar, the 17th high for the yuan since the beginning of this year.

The yuan, also known as the renminbi, has appreciated more than13 percent since it was de-pegged from the dollar in July 2005. It climbed 6.9 percent against the greenback in 2007.

The central bank report said most exporters had adapted better than expected to the stronger yuan.