China inflation to bounce above 2%

The growth of China's consumer price index (CPI), a major gauge of inflation, is expected to rebound above 2 percent in August and may limit the government's room for policy easing, analysts said.

The likely rebound in inflation would be mainly driven up by an increase in domestic food and fuel prices, said Tang Jianwei, a senior macroeconomic analyst at the Bank of Communications.

"The CPI growth looks certain to rebound to around 2.3 percent this month," Tang said.

China's domestic food prices have currently returned to the highest level of this year as a result of extreme weather as well as the rise in international grain prices, different sets of data from the ministries of agriculture and commerce have revealed.

As food prices account for about one-third in China's weighting of CPI calculations, the rally in pork prices over the past several weeks will help lift the August CPI growth from a 30-month low of 1.8 percent in July.

The National Bureau of Statistics is due to release the August inflation data on Sept 9.

China is still under pressure for higher prices in the following months due to the hikes of international oil and grain prices, Tang explained, adding that growing Chinese demand for pork and other food in the coming Mid-Autumn Festival in September will continue to support CPI growth.

Jing Ulrich, JP Morgan's chairwoman for China equities, warned in a report released earlier in August of a new round of inflation in China due to the recent spikes in global grain prices.

She projected the CPI growth would remain below 2 percent in the third quarter of 2012 and pick up again in the fourth quarter.

The rebound in inflation may not be good news for Chinese investors, who have long speculated an imminent easing in monetary policy by China's central bank, the People's Bank of China (PBOC) through cuts in banks' reserve requirement ratio (RRR) or the interest rate.

The PBOC, however, prefers to pump liquidity into the money market by carrying out reverse repurchase agreement (repo) operations, rather than lower the RRR.

The central bank's monthly net capital injection through reverse repos reached 344 billion yuan ($54.21 billion) in August, which was a 14-month high.

"Facing all-round increases in food prices from pork to eggs, the central bank has found itself in a dilemma on whether to loosen monetary policy to spur the slowing economy," said a report by Sinolink Securities, one of China's listed brokerage firms.

"Our projection is that the central bank will become cautious when it comes to policy easing," it said.

China's gross domestic product expanded only 7.6 percent in the second quarter, marking its slowest pace in three years and prompting calls for the government to take swift measures to stabilize the economy.