Chinese inflation was lower than expected at 4.9 percent in the year to January, though price pressures continued to build and will force the central bank to stick to its course of monetary tightening.

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KEY POINTS:

-- January CPI up 4.9 percent yr/yr (forecast 5.3 pct)

-- January PPI up 6.6 percent yr/yr (forecast 6.1 pct)

COMMENTARY:

ZHOU MINGJIAN, ANALYST AT GUOSHENG SEUCIRITIES IN BEIJING:

The inflation problem will persist in the coming year. The loose monetary policy in the past and reduced output of farm products indicate there is room for further rises in commodity prices.

GAO SHANWEN, CHIEF ECONOMIST AT ESSENCE SECURITIES IN BEIJING:

It's really hard to understand the January CPI figure, if the weighting change has little affect on the number. Maybe we should wait for the February CPI to have a clearer picture of the inflation situation.

February inflation is expected to be about 5.2 percent, and if the reading is significantly lower than that, we may conclude that inflation in China has changed fundamentally. Or we can say that the CPI indicator itself is quite doubtful in terms of reliability.

JONATHAN CAVENAGH, CURRENCY STRATEGIST AT WESTPAC IN SINGAPORE:

Inflation pressures are still very evident. The PPI firmed to 6.6 percent and non-food inflationary pressures continued to rise. So I would still expect to see tighter policy in coming months.

NIE WEN, ANALYST AT HWABAO TRUST IN SHANGHAI:

I think the reweighting of the CPI basket is reasonable, with the weightings of food prices being reduced and components, such as costs in residential factors, medical services and others increasing, which can better reflect the whole picture of the price rises.

Basically, I don't think the CPI weighting adjustment will have a big impact on the full-year inflation figure, which is expected to be lowered by 0.1 to 0.2 percentage points.

We keep our forecast that the central bank will raise interest rates one or two times in the remainder of this year.

DONGMING XIE, ECONOMIST AT OCBC BANK IN SINGAPORE:

January inflation is much lower than we expected....

Despite a lower CPI reading in January, we are not so positive about the inflation outlook in the next few months. Therefore, we think the tightening bias in China may remain intact.

XU BIAO, ECONOMIST WITH CHINA MERCHANTS BANK IN SHENZHEN:

The lower-than-expected headline inflation is definitely a good thing for the market. The possibility for further interest rate increases and reserve requirement ratio hikes has been reduced.

But of course, it is still up to the central bank's view of the situation.

CONNIE TSE, ECONOMIST AT FORECAST PTE IN SINGAPORE:

It may provide a false dawn and should be considered with caution mainly because recent indicators/developments still signal that upside risk to inflation persists.

Food prices ahead will likely be supported by the dry spells in the main wheat producing regions. I wouldn't be surprised to see another interest rate hike sometime in March.

LINKS:

For details, see the website of the National Bureau of Statistics at http://www.nbs.gov.cn. There may be a delay before it publishes a report on its website.

MARKET REACTION:

-- The Shanghai stock market was up 0.15 percent at 0204 GMT, compared with a rise of 0.38 percent before the data came out.

The yuan edged up 6.5930 per dollar from 6.5931.

BACKGROUND:

-- The economy is growing strongly even as the government ratchets up efforts to steer money and bank credit back to normal to put a lid on inflation.

-- China's central bank has raised interest rates three times in four months, most recently on February 8, as it has stepped up its fight against quickening inflation.

-- Further policy tightening is expected as the Chinese leaders have put the task of taming inflation at the top of their agenda. The latest Reuters poll showed that the central bank would raise interest rates twice more in the first half of this year.

(Reporting by Aileen Wang, Zhou Xin and Kevin Yao; Editing by Ken Wills)

China Inflation