Chinese consumer prices fell by 0.1 per cent in April, dragging annual inflation down from 3.6 per cent to 3.4 per cent. Producer prices rose by 0.2 per cent in the month but were down 0.7 per cent over the year.
- Chinese retail sales in April were up 14.1 per cent on a year ago (consensus 15.2 per cent); industrial production was up 9.3 per cent (consensus 12.0 per cent) – a near three-year low; and fixed asset investment over the first four months of 2012 was up by 20.2 per cent (consensus 20.5 per cent).
- The slower pace of growth combined with other data showing that inflation is in control gives Chinese authorities’ scope to ease bank reserve requirements.
- The Aussie dollar fell from US100.65c to US100.20c in response to the production and sales data. Our currency strategists believe the Aussie could ease to US98 cents in the next few months.
What does it all mean?
- The continued easing of inflationary pressures and sluggish economic data keeps the door ajar for Chinese authorities to stimulate the economy. Consumer prices fell in the latest month while producer or business prices are lower than a year ago. In addition data on investment, production and retail sales were below market expectations.
- While the door is open for an easing of bank reserve requirements or lower interest rates, it is clear from the central bank’s quarterly report that it will weigh factors carefully before seeking to boost growth. The People’s Bank of China noted yesterday that “The overall price trend is falling, but it has not yet stabilized, and we need to closely watch the upside risk for prices in the future.” China hasn’t cut the bank reserve requirement since February.
- While it’s encouraging that the central bank wants to be respected for inflation-fighting credentials, at the same time there is the risk that policy could remain too tight for too long, putting at risk near term economic growth. Every central bank has to strike a balance between growth and inflation and China’s central bank is no different.
- CommSec expects China to ease bank reserve requirements in May, with a move possible as early as this weekend.
- Until China starts to ease monetary policy there will be downward pressure on the Australian dollar. In addition, investors will prefer defensive and high dividend paying stocks in Australia such as Telstra and major banks in preference to resource stocks.
What do the figures show?
- The annual rate of consumer price inflation eased from 3.6 per cent to 3.4 per cent in April. Over the month prices fell by 0.1 per cent after rising by 0.2 per cent in March. Economists had tipped a 0.2 per cent fall in prices
- Food prices were up 7.0 per cent on a year ago (7.5 per cent in March), while non-food prices were up by 1.7 per cent on a year ago (1.8 per cent in March).
- Food prices plunged 0.9 per cent in the month while non-food prices rose by 0.3 per cent. Pork prices were up 5.2 per cent on a year ago, well down on the 56.7 per cent annual price increase in July last year.
- Producer prices (business inflation) fell by 0.7 per cent in the year to April (a 28-month low) after contracting 0.3 per cent in the year to March. Producer prices rose by 0.2 per cent in the month.
- Industrial output expanded at a 9.3 per cent annual pace in April, the slowest pace in 35 months and below forecasts centred on a result near 12.0 per cent.
- China’s urban fixed asset investment, such as spending on roads and power plants, grew at a 20.2 per cent in the first four months of 2012, modestly below forecasts (20.5 per cent) and down from 20.9 per cent in the January-March period. Investment growth is the slowest in over 9 years (since December 2002).
- Retail sales grew at a 14.1 per cent annual rate in April, down from 15.2 per cent in March and below forecasts centred on 15.2 per cent annual growth.
- National real estate development investment rose at an 18.7 per cent annual pace in the first four months of 2012, down from 23.5 per cent in the March quarter.
Data released earlier
- China’s trade balance soared in April. The trade balance continued to expand, moving from a deficit of US$31.48 billion in February to a surplus of US$5.35 billion in March and to a surplus of US$18.4 billion in April. Economists had tipped a surplus of $8.5 billion in April. Exports were up 4.9 per cent on a year ago (consensus +8.5 per cent) while imports were up 0.3 per cent (consensus +11.0 per cent).
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?
- While the Chinese authorities have been successful in engineering an economic slowdown to weed out inflation pressures, now the real test has arrived. China’s central bank must determine the size and timing of economic stimulus to ensure the slowdown doesn’t turn into something more dramatic.
- An easing of bank reserve requirements over the weekend would be well regarded. But until the stimulus arrives, the Aussie dollar will remain under downward pressure and investors will be reluctant to embrace mining and energy shares. Our currency strategists have revised forecasts for the Aussie dollar, now believing that it could fall to US98 cents in the short term before lifting to US105 cents later in the year.
- A weaker Aussie dollar would prove beneficial for most Australian businesses. However if the Aussie falls sharply, it will reduce scope for the Reserve Bank to trim interest rates.