TO THE POINT: China's economic figures for February indicated serious inflationary pressure with the consumer price index (CPI) surging 8.7 percent and the producer price index (PPI) jumping 6.6 percent, year on year. Though many repeatedly believed that prices would go down in the future, the fact that consumer goods continued to rise amid various countermeasures can no longer be ignored. The good news for the international market was that China's trade surplus shrank over 60 percent in February year on year, a reward for the government's efforts to rein in exports. In addition, China is determined to produce steel conglomerates to lift the country's competence in the international market.  By LIU YUNYUN

Key Economic Figures for February

Judging by the economic figures of January and February, the Chinese economy showed signs of overall inflation. But economists argued this was just temporary mainly because the Spring Festival (China's Lunar New Year) fell in that month. In the second week of March, the National Bureau of Statistics (NBS) released macroeconomic figures of February. The main figures follow:

CPI up 8.7 percent

Shortly after Premier Wen Jiabao's pledge to control CPI growth rate within 4.8 percent, February figures were released and nearly double the target, putting the government in an embarrassing predicament.

The CPI surged 8.7 percent in February year on year, the highest rise for this key inflation figure in over a decade. The February figure was 1.6 percentage points higher than that of January. Normally, a 3-percent growth of CPI is regarded as inflation.

The sharp price rises came after the worst snowstorms to hit south and central China in 50 years disrupted the economy and worsened food shortages. The NBS reported that prices of food rose more than 23 percent in February, with those of meat, eggs, vegetables, cooking oil and fruits increasing about 50 percent.

The CPI growth rate cast a shadow over the Chinese economy and put the government in a tight spot. The government could continue to take monetary measures such as interest rate hikes, but it would go against the international trend of interest rate cuts since the global economy has been on the recession track due to the U.S. subprime mortgage crisis. Further rate hikes would draw in speculative currency, which might lead to problems such as liquidity.

Though officials reiterated that the CPI surge was due to food issues and could be brought under control, analysts from financial institutions were not as optimistic. "International crude oil prices and other raw material prices will keep rising, adding heavy pressure to domestic consumer goods," said Li Maoyu, macroeconomic analyst with Changjiang Securities. Li believed that the CPI growth could be higher in the next few months.

International investment banks, Lehman Brothers, Deutsche Bank and Morgan Stanley, have all raised their expectations for 2008's CPI growth rate. Ma Jun, Deutsche Bank's Chief Economist in China, contended that the influence of the 18 percent surge in January agricultural prices would go on for four months, and he predicted the CPI would grow 7.2 percent in 2008.

PPI up 6.6 percent

Another indicator of inflation, PPI, grew 6.6 percent in February year on year, the highest monthly growth since December 2004.

PPI, a measure of the cost of goods when they leave the factory, had remained under 3 percent last year. The sharp growth caught China off guard, further adding to eventual cost rises in goods.

February's PPI rise was driven by a 37.5-percent jump in the cost of basic oil products and a 29.6-percent rise for a number of steel products, said the NBS. Prices of food-related raw materials rose by 11 percent.

In a bid to control possible inflation, the government ordered food producers to get official approval before they raised prices, while the prices for gasoline, electric power and fertilizer were set at a fixed price by the government since September last year.

However, producers like steel mills must pay the market price for coal, iron ore and other raw materials, which are not within the reach of government control, thus contributed to the large rise in PPI.

The country's worst snowstorms in decades damaged transportation and power grids, leading to shortage of coal and other raw materials for factories.

Li Huiyong, analyst with Shenyin & Wanguo Securities, contended that the February figure did not reflect the overall price rise and expected PPI growth in the next month would be higher than that in February.

Trade surplus down 64 percent

China's trade surplus shrank by one third year on year this February to $8.56 billion, marking the first decline in a year, according to General Administration of Customs. Economists believed that China's efforts to rein in exports and reach a balance of imports and exports had finally paid off.

Total value of imports and exports in February reached $166.181 billion, 18.4 percent higher year on year. Imports surged 35.1 percent to $78.81 billion, while exports rose merely 6.5 percent to $87.37 billion in February.

Chen Deming, Minister of Commerce, attributed the surplus decline to a number of reasons but especially to the drop in domestic production and shrinking foreign demand. During the Spring Festival, factories usually closed and stopped production. The U.S. subprime mortgage crisis dragged down the national economy and spread to European countries, leading to a declined international demand for Chinese products. Meanwhile, restraint measures targeting exports last year, such as lowering export tax rebates for labor-intensive and energy-consuming products, have taken effect.

Chen added the fast appreciation of the Chinese currency renminbi against the U.S. dollar was another key factor. In February 2007, renminbi against U.S. dollar was around 7.75, but on February 29 this year, the Chinese currency hit a central parity rate of 7.1058 yuan against U.S. dollar.

In spite of the sharp surplus decline, Chen was optimistic about the export growth this year, and reiterated that China had never deliberately pursued a trade surplus.

Money supply up 17.48 percent

Money supply grew 17.48 percent by the end of February 2008, and broad money (M2) stood at 42.10 trillion yuan ($5.93 trillion), increasing 17.48 percent year on year. Narrow money (M1) registered 15.02 trillion yuan ($2.12 trillion), representing a year-on-year growth of 19.2 percent, down 0.33 percentage points from the end of last year. Cash in circulation (M0) grew 5.96 percent year on year to 3.25 trillion yuan ($460 billion). The M0 by February was 25.25 percentage points lower than what it was at the end of January.

Renminbi loans up 15.73 percent

Renminbi loans increased 15.73 percent year on year by the end of February. Outstanding loans denominated in renminbi and foreign currencies of all financial institutions totaled 29.05 trillion yuan ($4.1 trillion), rising 17.05 percent year on year. Outstanding renminbi loans stood at 27.22 trillion yuan ($3.83 trillion). In February, renminbi loans registered an increase of 243.4 billion yuan ($34.28 billion), while the increase was 170.4 billion yuan ($34.28 billion) less than the same time last year.

"The February figures were good, and the central bank should be satisfied," said Lu Zhengwei, analyst with Industrial Bank. He said the drop of monthly money supply and renminbi loan showed central bank's efforts had paid off.

Sun Chunming, economist with Lehman Brothers, predicted the renminbi loans would further drop when tightened monetary policy exerted its function.

Renminbi deposits up 17.22 percent

Renminbi deposits grew 17.22 percent year on year. At the end of February, outstanding deposits denominated in renminbi and foreign currencies of all financial institutions totaled 41.59 trillion yuan ($5.86 trillion), up 16.01 percent. Outstanding renminbi deposit increased 17.22 percent year on year to 40.49 trillion yuan ($5.7 trillion). The monthly increase of renminbi deposits registered at 1.3351 trillion yuan ($188 billion), up 804.5 billion yuan ($113.31 billion) year on year.

Forging Mill Conglomerates

This year, Chinese steel mills will embrace the largest-ever merger and acquisition in history to forge internationally competent steel companies.

The country's steel sector, in spite of being the world largest, has been fragmented and has little influence in the international market.

Zhang Xiaogang, Chairman of the China Iron and Steel Association, announced that the iron and steel industry will go through intensive restructuring from now until 2010. "Small steel mills have to be either amalgamated into big ones or disappear," Zhang claimed.

Zhang complained that the integration level of Chinese steel industry was too low. Zhang said the production of the top 10 mills took up 34.7 percent of the nation's total in 2004, but dropped to 29.4 percent in 2006. Zhang vowed to lift production capability of the top 10 mills so that they can occupy half of the domestic market share.

A 2005 state steel industry policy expected the top 10 steel makers to control 70 percent of the country's total steel productivity by 2010, and Zhang believed mergers and acquisitions were the best solution.

Numbers of the Week 26.15% In February, the sales of passenger vehicles declined 26.15 percent from January to 488,900, according to the China Association of Automobile Manufacturers. Of the total, 231,800 vehicles, or 65 percent, were sold by the top 10 carmakers, including Shanghai Volkswagen, Shanghai GM, FAW Volkswagen, Chery and FAW Toyota. 28% The domestic shortage of coal cut coal exports to 3 million tons in February, down 28 percent compared with the same month last year. The National Development and Reform Commission's report noted that China will become a net importer of coal this year.