The monthly reports on China’s commodity imports and consumer price inflation published over the past 48 hours add to the evidence of recent manufacturing surveys that the slowdown in the economy that has lasted longer than many in the leadership would have liked may well have bottomed out.
The muted nature of inflation will be particularly welcome to the central bank. It gives it more room to maneuver in the event of the its U.S. counterpart starting to unwind its stimulus program. The uncertain effects on emerging markets and capital flows of the U.S. Fed starting to taper its asset purchase program is one of the main external risks now facing the Chinese economy.
Internally, local government debt, and by extension the banks that are carrying it, remains a concern. The latest national audit of that now underway should make it clearer how concerned we all should be (Pretty concerned, would be this Bystander’s stance). The slight easing of measures designed to keep a lid on property prices that have forced themselves on Beijing in recent months because of the persistence of the slowdown might provide local governments — and their bankers — with some temporary relief. However, policymakers will want neither to reinflate the property prices bubble they worked so hard to let down gently, nor to encourage local governments to return to investing in highways to nowhere.
And especially not ahead of the Party’s Third Plenum to be held in November. President Xi Jinping will need to advance his reform plans to rebalance the economy from investment and export-driven growth to that led by consumer demand. Xi has had to fall back on the old remedies to deal with the slowdown, such as investment in railways and public housing, but the need for structural reform hasn’t gone away. That his anti-corruption campaign has taken aim at some large state-owned enterprises standing in the way of reform may prove to be a not altogether accidental combination of timing.