Tag Archives: consumer price inflation

Ukraine Crisis Will Slow China’s Economy

Charts showing impact of Ukraine crisis on China's GDP growth and inflation in 2022 and 2023. Source: The Conference Board

CHINA WILL NOT be immune from the global economic impacts of the Ukraine crisis.

Higher prices for energy and food and metals commodities — Russia and Ukraine are significant producers of all three — will raise inflation, providing a drag on real GDP growth. Almost certain recessions in Ukraine and Russia due to the fighting and sanctions, respectively, and an intensification of existing bottlenecks in global supply chains for raw and intermediate goods will exacerbate the impact.

It is too early to know the severity of these shocks, given their dependency on the outcome of the crisis. However, some scenario-based estimates are being made.

One set that crosses this Bystander’s desk comes from The Conference Board, a US business research organisation, which produced the chart above. Assuming an oil price averaging $125 a barrel in the second quarter of this year, The Conference Board estimates that China’s GDP growth for this year will be reduced by between point two and point five of a percentage point and by the same amount in 2023.

By comparison, the comparative numbers for the world economy are reductions of 0.4-0.9 percentage points and 0.1-0.3 percentage points, respectively.

Long-term energy contracts and the likelihood of buying more discounted Russian energy and agricultural commodities such as wheat that Moscow will not be able to sell into sanctioning markets will somewhat mitigate the impact on China. Nonetheless, the Conference Board is forecasting a 0.5-1.5 percentage points increase in year-on-year consumer price inflation in China for this year and a 0.1-0.8 percentage points increase in 2023.

Those will be unwelcome numbers for authorities already struggling to tame politically sensitive energy and food price rises.

The Ukraine crisis will add to the challenge of meeting the newly announced target of 5.5% GDP growth for this year. That was already looking ambitious. Headwinds from the real estate slump, the cost of the zero-Covid tolerance policy and the measures imposed by the United States to limit Chinese access to US capital, technology and intellectual property are already slowing the economy’s momentum.

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China’s Economy Still Slowing

July’s monthly economic indicators now starting to be published show clearly that the hoped-for bottoming of China’s growth slowdown has yet to materialize. Both industrial output and retail sales growth slowed in the month, to 9.2% from 9.5% and to 13.1% from 13.7% respectively. That will add to the pressure on policymakers to increase the stimulative measures they have been taking. The fall in inflation to a 30-month low at 1.8% year-on-year gives them more headroom to do so.

Update: the unexpectedly slight 1% increase in exports in July is further evidence.

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China’s Slowing Inflation Reflects Slowing Economy

The main import of China’s consumer price inflation figure for June–up 2.2% on the same month a year earlier, it’s smallest monthly increase in 29 months–is that it affords plenty of headroom for further stimulus measures if required. Though a fall in food prices is the main reason that the headline number came down, non-food inflation held steady. That suggests a lack of demand that will be reflected in the second quarter GDP number to be released next week. Prime Minister Wen Jiabao called over the weekend for further stimulative tweaking of the economy via infrastructure spending. The dark lining to that silver cloud is that that it won’t do much for rebalancing.

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Inflation Fall Confirms Scope For Rate Cuts

The economic indicators we are expecting to provide the context for this week’s surprise quarter percentage point cut in interest rates by the People’s Bank of China are starting to come in. Among the first to arrive is consumer price inflation. At 3% for May, it is at its slowest monthly growth rate in two years, and down from April’s 3.4%, resuming the decline from last July’s 6.5% peak. The producer price index fell to 1.4% in May, confirming the global weakening of demand.

Both falls provide the headroom to cut rates without rekindling inflationary expectations. The cut in retail gasoline prices also announced this week was insurance. At least one more round of cuts to the banks’ reserve ratios followed by another modest interest rate cut seems likely for later this year.

Update: Industrial output in May ticked up by 0.3% from April’s 9.3% growth rate while fixed-asset investment, up 20.1% year-on-year, showed its third consecutive month of slowing growth and retail sales grew by 13.8%, down from April’s 14.1%. In short, plenty of evidence to support the shift of policy from reducing inflation to promoting growth. Zhuang Jian, an economist with the Asia Development Bank, summed up policymakers’ dilemma when he told state media:

Relying on investment to pull growth will have an immediate effect, but it will have negative repurcussions if not used rightly, while the consumption driver, though carries long-term value, is slow to boost economy.

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China’s Falling Inflation Still Demands Policy Caution

April’s consumer price inflation numbers released Friday follow weak trade and industrial production figures that all point to the slowdown in China’s economy continuing. The question is whether that slowdown is running to plan, or whether it is slowing more rapidly than the authorities would like, and thus requires a policy response to stimulate growth.

Outside commentators are leaning increasingly towards expecting that given the recent sets of monthly economic indicators, particularly those for inflation. The consumer price index (CPI) came in at 3.4% for April, down from March’s 3.6% and below the government’s 4% target for the third consecutive month. Yet, to this Bystander, the central bank’s warning earlier this week that inflation is falling but not yet stable suggests authorities will continue to be cautious about loosening monetary or fiscal policy.

The chain reaction that would cause a hard landing to the economy is a property bubble burst causing the local government debt bubble to burst, triggering a banking crisis, triggering a financial crisis, triggering an economic crisis, triggering a social crisis. Managing down the property bubble, as the first line of defense, has been the policy priority.  It has has some success in lowering home prices and reining in speculative building. Year-to-date property investment, at 18.7% is down from 34% in the same period a year earlier. But that growth rate still shows how much more there is to do.

If that doesn’t provide policymakers with reason for caution, then the suicide bombing of a government office in Yunnan earlier this week over an allegedly uncompensated land seizure, unusually prominently reported if only the most dramatic of increasingly common violent protests over land evictions, provides them with a stark and tragic reminder of what lies at the other end of the chain if the property bubble isn’t let down in a controlled way.

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China Will Remain Cautious Of Further Monetary Easing

The larger-than-expected fall in China’s inflation rate will rekindle expectations of monetary easing. Consumer price inflation fell to 4.2% year-on-year, its lowest level in 14 months. Though down from July’s peak of 6.5%, inflation is still running ahead of the government’s full-year target of 4%. GDP growth of 9.1% in the third quarter was the slowest in two years. Manufacturing contracted last month for the first time since 2008 and policymakers have been increasingly vocal in their concerns about the lack of demand in China’s export markets in the U.S. and Europe. However, while the decline in inflation – and the cooling of the real estate market – gives policymakers more leeway to stimulate the economy in the face of falling external demand, unless it collapses catastrophically, we expect them to be cautious about further easing, and especially until after the annual work meeting of the country’s senior economic planners this month.

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China’s Inflation, Growth Still Brisk Enough To Forestall Easing

Inflation was down in October for the third month in a row, with the Consumer Price Index coming in at 5.5% year-on-year, a full percentage point below July’s peak but still well above the official target of 4.0%. GDP growth also remains well in excess of the official target of 7%, topping 9% over the past three quarters. While slowing in the face of concerns about sluggish demand in China’s export markets, when taken in conjunction with the other continuing concern, about potential bad loans sitting on the banks’ books (and in the unofficial banking sector), growth remains robust enough for policymakers to refrain from any easing for now.

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China’s Inflation Peaks On A High Plateau


With our usual caveat about not relying on one month’s data, China’s inflation seems to have peaked with August’s consumer price inflation (CPI) coming in at 6.2% year-on-year, against July’s 6.5%. The number is considerably higher than target so getting it down further remains policymakers’ priority. August’s CPI figure was driven by food prices, up 13.8%, and contributing 4 percentage points to the headline number, officials say. Stripping that out would put inflation below target, which is making some think that there won’t be a further round of interest-rate rises as food prices aren’t overly susceptible to monetary policy. However, food prices are remaining stubbornly high and this Bystander suspects that the CPI underreports other prices rises that affect the politically sensitive cost of living. Thus another gentle twist of the monetary ratchet is likely before year’s end.

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China’s Fourth-Quarter Economic Outlook

The sluggish economies of the U.S. and Europe will likely pull growth in China down to 9% in the fourth quarter, and even possibly below, with domestic demand and investment not fully able to take up the slack or, in the later case, with property, not being wanted to. We expect GDP growth for the full year, however, to be closer to 10% than 9% and to moderate only barely in 2012.

Inflation will remain policymakers top priority in the fourth quarter. Consumer price inflation may have peaked at 6.5% in the third-quarter but will ease only slowly. A further round of interest rates rises before year end remains likely, along with more effective tightening of banks’ capital reserve requirements.

The yuan will continue to rise, unless demand in the developed economies falls markedly putting exporters under sudden stress. A stronger yuan should narrow the trade deficit, easing, if only slightly the task of neutralizing capital inflows from both commerce and speculation.

The largest risk to the economy, we believe, remains from a policy misstep in response to global economic uncertainties or foreign policy issues with economic ramifications as China heads into the sharp end of its leadership transition that starts next year.

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China’s Inflation Peaks

As expected China’s consumer price inflation rose in July, hitting 6.5% year-on-year, up from June’s 6.4% and remaining at a three-year high. Food, particularly pork, was the driver. With the latest monthly increase being just one tenth of a percentage point, we now look to be at or close to the peak. Signs are that food prices are moderating, at last, in response to administrative measures to bring them down; ditto with property to an extent. Ten months of monetary tightening are also starting to have their effect, with the economy slowing up (9.5% GDP growth year-on-year in the second quarter vs 9.7% in the second quarter). But just as the economy is still growing at above goal pace, so we expect inflation for the year to exceed the target 4%. The moderate monetary tightening is likely to continue.

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