Minister: China sees inflationary pressure rising despite efforts to control money supply

<br>SHANGHAI, China (AP) _ Inflationary pressures have been growing in China amid surging economic growth, despite official efforts to tighten controls on the money supply, a vice minister of finance said

Friday, April 16th 2004, 12:00 am

By: News On 6

SHANGHAI, China (AP) _ Inflationary pressures have been growing in China amid surging economic growth, despite official efforts to tighten controls on the money supply, a vice minister of finance said Friday.

Chinese leaders worry that overinvestment by companies in such industries as steel could set off inflation after years of declining prices. They also worry that a sharp increase in spending on factories and real estate could lead to a collapse later.

``Inflationary pressure has been growing,'' Vice Minister Li Yong said at a banking conference in Shanghai.

Though consumer prices rose only 2.8 percent in the first three months of the year, one component of it _ food prices _ jumped by 7.1 percent, Li said. Retail sales jumped 10.7 percent.

The government said Thursday that the economy grew by 9.7 percent in the three months ending March 31 _ far above the official target of 7 percent.

Chinese leaders have warned since last year of the potential dangers of continued high growth rates to the country's inflation rate and financial system.

They are trying to avert a repeat of China's experience in the early '90s, when surging economic output and unrestrained growth in credit set off double-digit inflation. Soaring prices threatened to ignite social unrest.

Inflation then was extinguished through the imposition of price controls and a cutoff of lending to state companies. Those measures were so severe that they led to a long downward spiral in prices in recent years, prompting some Chinese officials to worry that deflation might plunge the economy into recession.

Grain prices have shot up since last autumn, driven mostly by a steady decline in harvests over the past five years. Prices of vegetables, meat and other food have also jumped.

Last year, bank loans in China soared 21 percent to a record $1.9 trillion. In the past three months, outstanding loans have increased by 20 percent.

Regulators fear that excessive lending is supporting spikes in real estate development and in certain industries _ like auto manufacturing, steel and aluminum.

Demand for construction materials and industrial raw materials also is driving prices of steel and other commodities.

The central bank has responded by tightening the money supply, raising the limit on reserves that banks are required to hold in order to reduce the amount of money they can lend.

The restrictions have been harshest for weak banks that fail to meet international standards for capital reserves _ considered the weakest links in an already fragile financial system.