CommSec: China’s inflation dragon is being tamed

From

Chinese economic data

  • Inflation still creeping higher. China’s annual inflation rate rose from 5.3 per cent to a 34-month high of 5.5 per cent in May. But the result was only slightly above expectations centred on a result near 5.4 per cent. And the CPI grew by just 0.1 per cent in the month after a similar rise in April.
  • Food inflation – which has been the main driver of the recent higher inflation readings – fell by 0.3 per cent in May after falling by 0.4 per cent in April. Annual food inflation lifted from 11.2 per cent to 11.7 per cent.
  • Business inflation (producer prices) was steady at 6.8 per cent in May.
  • China’s industrial production grew at a 13.3 per cent annual pace in May – slightly above expectations. Retail sales were 16.9 higher than a year ago – slightly below expectations.

 

What does it all mean?

  • China’s policy makers continue to make good progress in restraining inflation without derailing the expansion. While the annual inflation rate was the highest in almost three years in May, prices edged just 0.1 per cent higher in the month. At the same time, production and retail spending continue to expand at solid double-digit annual rates, indicating that the expansion remains solidly on course.
  • You never seem to win when it comes to analysing Chinese economic data. Either one group will declare that growth is unsustainably strong while another group is quick to declare that the expansion is in trouble. But in the latest month there should be few complaints about the data. It is clear that policy makers are winning their battle with inflation while the economy is expanding at a pace that most would regard as sustainable.
  • Victory is never fully achieved against inflation so Chinese policy makers will need to vigilantly tracking key indicators over the coming months.
  • There isn’t a pressing need for the Chinese central bank to either lift interest rates or raise bank reserve requirements again. Now is a time of watching rather than a time for new action. But no doubt the central bank policymakers hold the same level of doubt about the accuracy of Chinese indicators as do analysts in the West. So complacency won’t be an issue for the People’s Bank – vigilance will definitely be maintained.

 

What do the figures show?

  • The annual rate of consumer price inflation rose from 5.3 per cent to 5.5 in May. The May result was marginally above forecasts centred on a result near 5.4 per cent. Over the month inflation rose by 0.1 per cent in May after a similar increase in April.
  • Food prices rose by 11.7 per cent over the year to May (11.2 per cent in April) while non-food prices rose by just 2.9 per cent (2.7 per cent in April). Over the month, food prices fell by 0.3 per cent after falling by 0.4 per cent in April while non-food prices rose by 0.2 per cent.
  • Producer prices (business inflation) rose by 0.3 per cent in May to stand 6.8 per cent higher than a year ago (unchanged from April). The annual rate of producer price inflation has eased from a 30-month high of 7.3 percent in March.
  • Industrial output expanded at a 13.3 per cent annual pace in May, down from 13.4 per cent in April but above forecasts centred on 13.2 per cent. Production is still well off the highs of 20.7 per cent annual growth in January/February 2010.
  • China’s urban fixed asset investment, such as spending on roads and power plants, grew at a 25.8 per cent annual pace in May, ahead of consensus forecasts (25.2 per cent) and up from 25.4 per cent in April.
  • Retail sales grew at 16.9 per cent annual rate in May, down from 17.1 per cent in April but close to market forecasts, centred on 17.0 per cent annual growth.

Data released earlier in the month:

  • China’s trade surplus widened in May but fell short of expectations. The trade surplus rose from US $11.42billion in April to US$ 13.1 billion in May but fell short of forecasts centred on a result near US$18.6 billion. Exports were up 19.4 per cent on a year ago (consensus +21.0 per cent) while imports were up 28.4 per cent (consensus+22.5 per cent).
  • China’s M2 money supply grew at a 15.1 per cent annual rate in May, down from 15.3 per cent in April and short of forecasts centred on 15.4 per cent growth. New Yuan loans totalled 551.6 billion yuan in May, down from 739.6 billion in April. Outstanding loan growth slowed from an annual pace of 17.5 per cent to 17.1 per cent in May.

What is the importance of the economic data?

  • China’s National Bureau of Statistics releases its monthly economic statistics around the middle of each month. Quarterly GDP data is released around the 16th of January, April, July and October. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy.

What are the implications for interest rates and investors?

  • Domestic investors have reacted positively to the latest batch of Chinese economic data. The Aussie dollar rallied and losses on the sharemarket narrowed.
  • The Reserve Bank would be encouraged by success achieved by China over inflation and further signs that economic expansion is on a more sustainable footing.

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