Effects Of High Oil Prices On Chinese Economy.

Surging oil costs helped drive Chinese producer prices to their most rapid rise in at least seven years during October, reinforcing a sense among Chinese policy advisers and senior bankers that interest rates are set to rise further in coming months. The producer price index (PPI), which measures prices of goods at the factory gate, rose 8.4% in October compared with the same month a year ago, the biggest monthly leap since the Asian crisis hit the region in 1997/98.

Although the October leap was in part due to higher oil prices, other more entrenched factors - such as rising steel, coal, electricity and other metal prices - also contributed to rising prices, officials at the National Bureau of Statistics said. The Financial Times on Nov. 12 quoted Ma Weihua, president of China Merchants Bank, a leading commercial bank, as saying the problem of excessive investment in fixed assets had not yet been resolved and this was leading to inflation and distortions in the economy. He added: "There is room for interest rates to rise and I think there could be another rate rise". He said negative real deposit rates in the banking sector were leading to speculative buying of property, which was a concern.

China last month raised its interest rates for the first time in nine years by 0.27% for one-year loans and deposits, triggering sell-offs in world metal exchanges and depressing the stock prices in Europe and the US. However, some economists in China argued that Beijing may wait some time before making another decision on interest rates because some indicators were starting to show areas of the economy slowing appreciably. Growth in China's broad money supply eased to 13.5% in the year through October, the slowest pace in nearly three years, below the target of 17% set by the People's Bank of China (the central bank).

Official statistics showed the PPI was driven higher in large part by the price of crude oil, which rose 41.4% in October compared with the same month a year ago, while gasoline was up 21.6%, and coal was up 22.2%. Prices of steel products were up between 14.5-22.6%.