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About a fifth of a jump in Chinese factory gate inflation is likely to feed through into consumer prices, but the People's Bank of China need not take immediate policy action unless it becomes clear that local demand is also causing an acceleration in prices, a prominent policy advisor and former member of the PBOC's monetary policy committee told MNI.

Much of the surge in annual producer price inflation to a more-than-3-year high 6.8% in April was due to rising prices for raw materials and components which are already squeezing manufacturing profits, particularly in some export-oriented regions and sectors, Ma Jun said in an interview.

"It is premature to judge whether a tighter monetary policy is warranted at this moment, as consumer price inflation and employment remain in comfort zones," he said, adding that it was important for policy makers to assess the extent to which the rise in PPI is driven by domestic demand in addition to imports.

The most appropriate policy options to deal with imported inflation could include reductions in import tariffs and government fiscal measures, Ma said, noting that the PBOC is no longer engaged in regular intervention in the foreign exchange market.

TIME LAG

The consumer price index rose by only 0.9% in April versus a year earlier, with core CPI adding 0.7%, National Bureau of Statistics data shows. Eventually some of the PPI inflationmay pass through to core CPI, said Ma, noting that "historically the passthrough rate is about 20% with a time lag of about six months."

Monetary indicators have been mixed, with total social financing and loan growth remaining above 10% year-on-year but M2 growth fell to around 8% in April.

April's larger-than-expected fall in the M2 measure of the money supply was exaggerated by base effects, Ma said.

While any move by the Fed to taper its bond purchases may not directly affect Chinese markets to a significant degree, it could prompt capital flight from other emerging markets, potentially driving their currencies weaker against the yuan with an impact on China's export competitiveness, Ma said.

MNI London Bureau | +44 203-865-3829 | jason.webb@marketnews.com
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MNI London Bureau | +44 203-865-3829 | jason.webb@marketnews.com
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