MercoPress. South Atlantic News Agency

China's economy overheated economy spurs inflation

China's annual consumer prices index reached a seven year high in April, 3,8% driven mainly by increases in food costs according to the latest report from the country's Statistics office.

Last week Premier Wen Jiabao warned about the overheating of the Chinese economy after expanding 9,1% in 2003, and with the first quarter of 2004 indicating an annualized 9,7% plus a neck breaking 47% jump in fixed assets investment.

Mr. Wen Jiabao described China's growth as "excessive", and admitted "we are under pressure from inflation". During April food prices rose 10% and grains overall kept increasing.

Market analysts are predicting that the Chinese Central Bank might decide the first interest rate rise in nine years to help cool the inflation.

Some of the more immediate countermeasures include limiting increases in public utility costs and reducing banks loans.

But analysts also warn that any drastic move regarding Chinese financial markets could have devastating effects for the local banking system with bad debts totalling over 200 billion, and the world economy, since China has become the world's sixth economy, fourth world exporter and relentless consumer of commodities helping to boost emerging markets economies.

Regarding the banking system Liu Mingkang, head of China's Banking Regulatory Commission said bankers must get "tough" and "enhance a credit culture" ensuring that customers repay loans.

According to international credit rating agency Standard & Poor's, non performing loans in the country's four main state banks that hold 80% of all loans, could amount to more than 40% of the overall book, with most defaulting debtors government companies and high placed government cronies.

It is believed that Beijing was forced to inject massive support to the Bank of China and the China Reconstruction Bank, and new bails could be in the making.