Chinese inflation data sparks overheating fears

Inflation in China has reached its highest level for more than a decade, fuelling fears that the Chinese economy, now a major engine of global growth, may be overheating badly.

Chinese growth is estimated to be 12 per cent this year, and the IMF says it will account for a greater share in world growth next year than the US.

The country's trade surplus also swelled last month, again an indicator of the potentially unsustainable pace of growth. China is making slow progress in normalising its external account, seen as one of the key imbalances in the global economy. Should Chinese growth falter, the world could be tipped into recession.

Consumer prices rose 6.9 per cent in November from a year earlier, after climbing 6.5 per cent in October, more than economists expected. As in the West, much of China's inflationary spike was down to higher prices for food, oil and other commodities, as the world struggles to sate China's rapacious appetite for the raw materials of industrial growth.

However, unlike the West, food accounts for about a third of consumer price inflation in China; so this global phenomenon is affecting the country's population more severely. Tough measures to crack down on inflation could puncture the property and stock market bubbles, and jeopardise China's new role as the engine of world growth.

The authorities in Beijing moved swiftly yesterday to try to cool the economy. Regulators told banks to tighten lending into the booming real estate market, pointing to the painful experience of previous Asian property bubbles and the US sub-prime crisis. State-owned companies will be required to pay dividends of up to 10 per cent of their profits to the Government, restraining what officials call "excessive" growth in fixed-asset investment.

Economists expect China to raise interest rates this month. China's one-year lending rate is at a nine-year high of 7.29 per cent after five increases this year.

Mark Williams at Capital Economics said: "There is certainly a lot of noise coming fromBeijing at the moment about limiting credit growth, and today's measures are part of it. Unfortunately, attempts to limit thevolume of lending are easilycircumvented."

China's trade surplus climbed 14.7 per cent to $26.3bn (12.9bn) in November compared to a year earlier; a slowdown in shipments to the US has been offset, so far, by exports to the EU. The surplus continues to boost China's economy and to create inflationary pressures.