Tag Archives: inflation

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.

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China Cuts Banks’ Reserve Requirement Ratio

China’s central bank has cut the country’s big banks’ reserve ratio by 50 basis points to 20.5%. The move, effective February 24th, will pump an estimated RMB350 billion-400 billion($56 billion-64 billion) into the economy.

While the People’s Bank of China has been gently expanding credit in recent months in the face of the economy’s slowdown, it had held off reserve ratio requirement cuts since making a first one in November. However, the slowing of money supply growth in January to 12.4% from December’s 13.6% along with a year-on-year 0.5% contraction in exports last month and increasing anxiety about the crisis in the eurozone, has forced the central bank’s hand.

Yet, with inflation staying stubbornly high and the post-2008 global financial crisis stimulus still being wound down, the central bank has to remain careful of easing monetary policy to fast and too far for fear of inflating another bank-lending-driven speculative bubble in assets such as real estate. The local-government debt time-bomb is still ticking quietly in the background, with the threat that poses to the banks that funded it scarcely diminished.

Update: From a PBOC follow-upstatement issued on Sunday, quoting  Jin Qi, assistant to the PBOC governor, speaking at a meeting held on Thursday and Friday:

Both the pressure of growth moderation and that of price rises exist at the same time. The overall tone of the monetary policy will stay prudent…The current international economic situation remains complicated and grim, while China’s economic development is still not balanced, coordinated or sustainable enough.

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A Glittering Year For China’s Gold Bugs

Demand for gold in China shot up by 20% last year, according to the World Gold Council’s latest Gold Demand Trends report. Some of that reflects a long-standing Chinese affection for the metal; some a newer obsession with all things conspicuously luxurious. The Council says Chinese consumers bought 510.9 tonnes of gold jewelry in 2011, worth $25.8 billion and a 13% increase over the previous year (the global market shrank 3%). China surpassed India as the world’s largest market for gold jewelry in the second half of last year, the Council says.

The fastest growing demand for the metal in China came from investors, however. Only a slither of that is likely accounted for by the People’s Bank of China. Globally, central banks more than quintupled their net gold buying last year from 2010’s levels, to 439.7 tonnes, to diversify their foreign exchange reserves and reduce exposure to the travails of the two main reserve currencies. However, China’s is not among the eight central banks the Council names as prominent official buyers, with Mexico and Russia’s accounting for nearly half of net purchases.

Instead it was individual Chinese, now able to buy more easily through both the official exchange in Shanghai and unofficial exchanges in other big cities, that were the driving force behind China’s investment demand in 2011. In a year that saw the gold price hit a record of $1,895 an ounce in September before falling back, consumers bought a record volume of 258.9 tonnes of gold bars and coins, worth $12.9 billion, up 38% on 2010’s purchases. Domestic investors saw gold both as a traditional hedge against the year’s high inflation and as a better alternative than stocks, property or cash savings in an uncertain year. The appreciation of the currency meant the metal’s price rose by only 4.3% in yuan terms over 2010 compared to its 8.9% rise in dollar terms.

With the gold price pulling back 15% from its record high, authorities cracking down on illegal trading and inflation moderating, will China’s gold bugs be as bullish in 2012? “Signs of economic slowdown in China, and the increasing maturity of the market, are likely to result in a deceleration of recent growth rates, evidence of which was already coming through last quarter,” the Council warns.

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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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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.

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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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Hot Money And Cold Reality

Hot money, fickle by nature, may be turning its back on China. Figures showing that banks were net sellers of foreign currency in October for the first time since May last year suggest just that. They sold 24.9 billion yuan ($3.9 billion) worth in October versus buying 247.3 billion yuan worth in September. Reasons could be various: dollar flight in the face of the euro crisis; cooling property prices; expectations of near-term yuan appreciation evaporating. Be cautious, beyond our usual one month’s figures warning, of taking the numbers as a bearish sign for the economy that might turn the current “fine tuning” of monetary policy into something looser. The central bank says that credit is abundant and inflation remains relatively high.

Footnote: The central bank’s comments came after it broadened its M2 definition of the money supply, effectively bringing in the banks’ off-balance sheet lending, implicitly acknowledging that the old measure underestimated the money supply, and made it an unreliable benchmark of whether monetary policy was being effective.

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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 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.

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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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