The ex-factory price of China's industrial products, a guide to the trend of consumer prices, rose 3.5 percent in February compared with the same month of last year, the National Bureau of Statistics said Wednesday.

The ex-factory price, which is measured at the factory gate, remained at the same level as that in January.

But it rose significantly from the 1.9 percent growth recorded in November and 1.2 percent in October, propelled by soaring costs of raw materials.

Prices of steel products rose between 19.7 percent and 36.7 percent in February compared with the same month of last year, and coal prices rose a year-on-year 8.7 percent, spurred by strong demand.

Alumina prices surged 22.5 percent in the month, while copper prices jumped 18.1 percent and zinc prices rose 15.1 percent, the bureau said.

Qi Jingmei, a senior economist with the State Information Center, said the higher price was mainly due to the strong demand spurred by the fast fixed asset investment and industrial output.

China's fixed asset investment grew a year-on-year 53 percent, and industrial output rose a year-on-year 16.6 percent during the first two months.

The ex-factory prices of industrial products, as well as purchasing prices for raw materials, fuel and energy are important indicators for the consumer price index (CPI), the key inflation measurement for Chinese policy-makers, Qi said.

"More or less, the higher production prices will translate into higher consumer prices," she said.

China's CPI rose a year-on-year 2.1 percent in February, 3.2 percent in January and December.

Zhu Jianfang at China Securities said CPI would maintain a relatively high level from March on.

Higher CPI rates increase worries for both government officials and economists, who fear the country's economy might overheat.

People's Bank of China's Governor Zhou Xiaochuan said the government should be on the alert for possible inflation.

Researcher Wang Zhao of the State Council's Development Research Center said there are already some early signs of inflation.

Zhu said if CPI continues to stay at the 3 percent level or higher in the coming months, there will be a possibility of raising interest rates.

Song Guoqing, a professor at Peking University, said the government should have already raised interest rates to deal with the increasing inflationary pressure.

"If people feel the trend of price rises, they will rush to buy more goods," he said.

The panic purchasing will push the commodity price rise further and then inflation will occur, meaning the government must adjust interest rates in a timely manner, he said.

Presently, the benchmark one-year bank deposit rate is set at 1.98 percent.

"People are losing out when they save their money in banks because of low interest rates," he said.

The lower interest rate will also have an impact on people's consumption behavior, he said.

People will borrow money from banks to buy larger items like houses to wait for further price rises to make profits.

This would stimulate demand, which in turn fuels inflation, he said.

The lower interest rate would also stimulate investment, some areas of which are considered overheated, Song said.

But Zhou Xiaochuan said the government would not raise the yuan interest rate this month, because inflation was still mild.

(China Daily March 25, 2004)