Inflation is taking its time to decline, complicating policymakers’ options to deal with the overall slowing of China’s economy. March’s consumer price inflation number came in at 3.6% year-on-year, up from February’s 3.2%. February’s number was distorted by the early new year. The better benchmarks to look at are the 6.5% the CPI peaked at last July and the 3.8% it has averaged over the past quarter. March’s producer price index, which measure’s wholesale prices, fell slightly, also reinforcing the downward inflationary trend.
GDP growth for the first quarter, due to be announced on Friday, is expected to be reported at 8.4%, down from 8.9% in the fourth quarter of last year. The persistence of inflation means the central bank is unlikely to cut interest rates in response. It may cut banks’ capital reserve ratios to put more money in to the economy, but policymakers remain concerned about the threat of bad loans sitting on the banks’ books. That leaves either some sort of infrastructure stimulus spending, either formally or informally as it has started doing by easing the banks’ loan ceilings, despite the long term risks of adding yet more unsustainable debt, and refueling the property bubble authorities have worked so hard to cool, or hoping that growth in the U.S., or less likely Europe, picks up sufficiently to revive the fortunes of China’s hard-pressed exporters.