China: A sweet set of numbers

China’s annual inflation rate fell from 2.5 per cent to 2.0 per cent in January, in line with forecasts for a result near 2.0 per cent.

• Over the month inflation rose by 1 per cent (forecast +0.9 per cent) driven by a sharp 2.8 per cent lift in food prices. Non-food prices were up just 0.1 per cent in the month.
• Producer prices rose by 0.2 per cent in January after a 0.1 per cent fall in December. Producer prices are 1.6 per cent lower than a year ago (forecast, 1.6 per cent decline).
• China’s trade surplus narrowed from US$31.6 billion to US$29.15 billion in January. The result was well above forecasts for a surplus near US$24.7 billion. Exports rose by 25 per cent in the year to January (fastest rate in 21-months) while imports were up 28.8 per cent (fastest rate in 11-months). Both results were well above market forecasts.

What does it all mean?

• The perfect set of numbers. The Chinese economy is gathering momentum but at the same time inflation remains well contained. Effectively this is the sweet spot for policymakers. Healthy sustainable growth without an inflationary issue.
• In fact the ongoing deflationary environment for business inflation suggests price pressures will remain well contained over the near term. The key focus will be food prices. Seasonal factors and cold weather caused a lift in food prices late last year.
• Food prices soared 2.8 per cent in the month, driven by a 12.7 per cent lift in vegetable prices, but non-food prices were up just 0.1 per cent. Not only are there social implications with rising food prices but the risk is that higher prices may be passed through to other goods. In addition the data on exports and imports show that the Chinese economy is quickening, highlighting the need for vigilance on inflation.
• The trade balance result was certainly surprising and came in well ahead of expectations. Exports surged by the fastest rate in almost two-years in the year to January, while imports were tracking at the fastest pace in almost a year. And while the data bodes well for activity levels, it needs to be tempered with a dose of caution. The results were boosted by the early timing of Chinese New Year, with businesses in China ramping up shipments before closing down for the holiday break.
• Having said that, there have been clear indications over the past few months of an improvement in Chinese activity. After bottoming out last year, manufacturing, industrial production and even retail sales have been tracking higher. The recovery certainly looks to be on a sustainable footing, the challenge will be achieving firmer growth while keep prices pressure in check.
• Overall the latest data bodes well for Australia, and the Reserve Bank does seem more comfortable about the fortunes for Australia. And it is looking more unlikely that the Reserve Bank will be cutting interest rates in the near term given the improving global outlook. In the past few weeks the improvement in confidence levels and rise in share markets will be another reason that the Reserve Bank will keep interest rates on hold.

What do the figures show?

• The annual rate of consumer price inflation eased from 2.5 per cent to 2.0 per cent in January, above expectations centered on a result near 2.0 per cent. Over the month inflation lifted by 1.0 per cent, above forecasts centered on a 0.9 per cent increase.
• Food prices rose by 2.8 in January with non-food prices up 0.1 per cent. Over the year to January, food prices rose by 2.9 per cent (4.2 per cent annual in December) while non-food prices were up by 1.6 per cent (1.7 per cent in December).
• Food: Prices of fresh vegetables soared 12.7 per cent in January with pork up 5.2 per cent, meat & poultry up 3.2 per cent and fresh fruit up 4.3 per cent.
• Producer prices (business inflation) rose by 0.2 per cent in January after a 0.1 per cent decline in December. Producer prices are 1.6 per cent lower than a year ago in January after falling at a 1.9 per cent annual pace in December. The annual rate of producer price inflation peaked in July 2011 at 7.5 per cent and had been declining consistently each month to September (3.6 per cent annual decline).
• The trade surplus narrowed from US$31.6 billion to US$29.2 billion in January. Economists had tipped a surplus near US$24.7 billion in January. Exports rose by 25 per cent over the year to January (forecast +17.5 per cent) while imports rose by 28.8 per cent (forecast +6.0 per cent).

What is the importance of the economic data?
China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 16th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10th of each month. 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?
The Chinese economy is strengthening, giving the Reserve Bank further reason to stay on the interest rate sidelines.
Chinese inflation is not a problem and indeed official forecasts suggest that inflation will lift to around 3.5 per cent in 2013 from 2.5 per cent in 2012.