China’s Inflation Cools Further

Consumer price inflation in China is now down to its lowest level in almost three years. October’s consumer price index rose 1.7% year-on-year, compared to September’s 1.9% and August’s 2%. The deceleration last month was more rapid than expected on the back of weaker food prices. Policymakers now have more scope to spur growth should they chose to do so, though the central bank has been using open market operations as its main way to reverse the slowdown of the economy. The liquidity it is injecting can be swiftly withdrawn if inflationary pressures resume, a lesson learned from the inflation spike that followed the massive stimulus package introduced after the 2008 global financial crisis and which has taken it a long hard slog to bring down.

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.

Pressure To Restart Work On Myitsone Dam Intensifies

Beijing continues to press Myanmar to allow a restart to work on the Myitsone Dam. Myanmar’s President Thein Sein unexpectedly and unilaterally pulled the plug last September on state-owned China Power Investment Corp.’s controversial hydropower project in Kachin state near the headwaters of the Irrawaddy river. The issue was again raised by foreign minister Yang Jiechi during his Myanmar counterpart’s visit to Beijing this week.

Meanwhile, CPI is pressing ahead with a new feasibility study addressing the environmental and social impact of the dam, this Bystander understands. It is recruiting a group of international dam-building experts for the task. Contrary to some reports, this is not being done by the Paris-based International Commission on Large Dams (ICOLD), an influential industry standards group, according to a statement the organization issued at the end of last month. It did confirm that CPI had “directly asked experts coming from countries with long term experience in building and operating large dams to assess its work”. It also said that Myanmar had applied for membership of ICOLD, whose current president happens to be from the China Institute of Water Resources and Hydropower Research.

CPI and its sub-contractor Sinohydro have kept about 200 workers on site regardless of the suspension. As we noted before, any resumption of work would have to wait until the end of the rainy season in October. But the increasing pressure form Beijing is making hitting that deadline look increasingly likely.

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.

China’s Inflation Remains Stubbornly Persistent

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.

China Inflation Watch

This Bystander is less sanguine then some about the January inflation number. Much of the jump in the consumer price index (CPI) to 4.5% year-on-year from December’s 4.1%, reversing five months of decline, can be explained by seasonal factors, notably an early Lunar New Year. But there are some points of concern in the core numbers that bear keeping an eye on.

Non-food price inflation was up 1.8% Y-o-Y, higher than expected. We’ll have to wait for February’s numbers to better judge how much the rise in food prices, up 10.5% Y-o-Y, is attributable to the new year and how much to the return of a firming of global agricultural commodity prices. Shrinking acreage and rising demand for food is making China a larger and larger food importer. One month’s figures, especially from an abnormal month like January, don’t deflect us from our view that the trend is a decline in inflation, but we shall keep a weather eye on the rate of that decline to see if it moderates. The chart above, from the IMF, shows both the trend and the importance of food prices to the overall number.

The latest first-quarter growth forecast from an official source is 8.5%, announced today by the State Information Center, a government think tank. That is down from the 8.9% the center estimates for the fourth quarter and 9.2% for full-2011. Yet it is still a sufficiently brisk pace of growth, especially when taken with the January CPI numbers, for economic planners not to have to rush to further monetary easing.

These are uncertain times for the economy, with the IMF advising Beijing to stand ready with a ‘significant fiscal package’ in the event growth in the eurozone suddenly collapsed. Such spending would likely be just as inflationary as the stimulus that followed the 2008 global financial crisis.

Food Prices Confound China’s Slowing Consumer Price Inflation

Consumer prices rose by 5.4% in 2011, far ahead of the government’s target of 4%. But December’s monthly figure was down to 4.1% year-on-year, its slowest growth rate in 15 months, and well down from July’s 6.5% peak (via Xinhua). That suggests there is scope for China’s policy makers to continue priming the credit pumps, if cautiously. Next week’s GDP numbers are likely to show that growth has slowed to below 9% for the first time in ten quarters.  Economists’ consensus is 8.7%; we think the number will come in a tad higher.

The conundrum for political leaders is food prices. They increased by 9.1% in December. Food prices are the component of the consumer price index least amenable to control by monetary policy while also being the most politically sensitive. Rising living costs are a ready cause of public dissatisfaction. Hitting the official inflation target is starting to look increasingly meaningless to Chinese consumers who don’t see the numbers aligning with what is left in their pockets.

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.

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.

China’s Inflation Remains Stubbornly High

Consumer price inflation remains persistently high, though it has eased from July’s peak of 6.5%. September’s number came in at 6.1%, against August’s 6.2%. The summer’s storms and droughts kept food price rises from moderating. The food component of the inflation figure rose 13.4% in September, as it had in August.

With the global economic outlook still uncertain, policymakers at the People’s Bank of China are likely to maintain their policy tightening on hold, but this latest set of monthly numbers won’t do enough to lower inflationary expectations to give this Bystander any confidence that there won’t be another round of interest rate rises or bank capital reserve increases.