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China Inflation Watch

Contributors to China's Consumer Price Index, 2007-2012. Source: IMF

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.

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China’s February Exports Reflect Grim Trade Picture

As we’d feared, the February trade figures were grim, with exports down a quarter from a year earlier regardless of what had been expected to be a mitigating factor of a shortened trading month because of New Year.

It marked the fourth consecutive month of year-on-year declines as the global economic slowdown takes its toll. With imports down 24.1% the  trade surplus, though, shrank from $39.1 billion to $4.8 billion, easing some of the international pressure on Beijing to appreciate the yuan (but there is a seasonal effect; the trade surplus usually shrinks in the first quarter, so wait and see, especially if commodity and energy prices stay low).

If you average out January and February’s trade figures to account for New Year, you are still seeing a 21% fall in exports year on year. So more tax breaks for exporters: commerce minister Chen Deming says export taxes will be reduced to zero. But what China’s exporters most need is recovery in their U.S. and European markets.

It is the import side of the trade balance that is more interesting. If you do the same averaging out over the first two months of the year, you get a 34% fall in imports, though remember that is a value not volume number. The precipitous fall in energy and commodity prices over the past year, noted above, will amplify the percentage fall.

This Bystander’s back of the envelope calculation — his favorite sort — is that assuming the commonly used 20% real decline in raw material import prices, then import volumes are holding steady.  Given what is happening to exports, that suggests a marked diversion of resources to domestic demand. Further evidence to support this notion is the strong increase in fixed asset investment in the first two months of the year, separately announced: another sign that November’s  stimulus is starting to have an impact, and putting in place a prop not just for China’s but also the world’s growth .

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