Analyzing the New Inflation Release in China
China’s inflation figure is being closely watched, because aside from government and central bank intervention in the West, the really big driver during the crisis was a massive spending spree by China – around 20% of GDP! While cheered at the time in most quarters some (hand raised) said there would be ill effects…. True to form, it led to many bad loans as so much money was shot out in every direction…. China is currently dealing with that fallout.
That said, the world’s speculators are praying for a new round of China stimulus even as the country grapples with the mess their last “Greenspan policy” left behind. However, China has had an inflation problem – and in a country where food inflation can lead to social strife, that’s no small matter. So today’s news that ‘official’ inflation is falling, will make those who demand government’s step in at every corner, happy as it may point to an end of central bank tightening.
As always with the China inflation figure – take it with many grains of salt… hence my quotation marks around “official” inflation.
- Chinese industrial output grew at its weakest annual pace in a year in October and inflation fell sharply, raising expectations Beijing will do more to support economic growth by “fine tuning” policy.
- A flurry of data on Wednesday showed that China’s factories are bearing the brunt of a modest economic slowdown even as consumer spending and investment in assets such as roads and other infrastructure remain resilient.
- China’s annual inflation rate fell to 5.5 percent in October from September’s 6.1 percent — the biggest drop in the annual rate from one month to the next since February 2009 — and a further pullback from July’s three-year peak of 6.5 percent.
- The 5.5 percent rise in the consumer price index in the year to September was in line with expectations from a Reuters poll.
- Producer price inflation also showed a marked slowdown to 5.0 percent in October, a one-year low, from 6.5 percent in September. The median of a Reuters poll had forecast an October reading of 5.7 percent.
- “All of this suggests that the balance of risk for the PBOC and State Council is likely shifting to growth and away from inflation,” Tim Condon, head of Asian economic research at ING in Singapore, said.
- China’s leaders have begun talking in recent weeks about “fine tuning” macroeconomic policy to maintain economic growth, which slowed in the third quarter to 9.1 percent, its weakest in more than two years.
- Premier Wen suggested prices had continued to fall. “Since October, overall domestic prices have been falling noticeably,” Wen was quoted as saying by a government website. “Prices of pork and eggs have fallen, but prices of fruit, dairy products, beef and mutton remain at high levels.”
- But Zhou Wangjun, a senior official at the National Development and Reform Commission, saw inflation staying high and said it was too early for Beijing to relax policy. “We will still maintain the prudent monetary policy and control the amount of money in circulation,” Zhou said, adding that the government will boost supplies of farm products to help put a lid on price rises.
- Wen and other policymakers have made it clear that stabilizing prices and fighting inflation are the top priority, so analysts rule out an early rate cut or reduction in bank reserve ratios.
- Evidence that food inflation is easing also supports the case for further fine-tuning measures from the government. Food prices, a major source of inflationary pressure in China, rose 11.9 percent in October from a year earlier, the smallest annual increase since May. But they fell 0.2 percent from September, the first decline since May.
- Even after the big fall in October, inflation remains well above the government’s 2011 target of 4 percent.
- While most analysts rule out an immediate cut in interest rates, there is more debate on when the central bank might reduce bank reserve ratios. At 21.5 percent, the RRR is at a record level for big banks.
Meanwhile industrial production has slowed some as well:
- Industrial output rose in October by 13.2 percent from a year earlier, slightly below expectations for a 13.4 percent rise and the weakest pace since October 2010. Exports were a net drag on China’s economic growth in the first nine months of this year as the sector felt the chill of a weak global market.
Trader Mark is the author of Fund My Mutual Fund.