China policy outlook murky after mixed bag of data

By Langi Chiang and Simon Rabinovitch

BEIJING (BestGrowthStock) – Chinese inflation quickened to a 19-month high in May, but a moderation of growth in factory output and capital spending eased worries for some analysts that the world’s third-largest economy could boil over.

Others took the opposite view, arguing that China needs to stave off the risk of overheating by raising interest rates and letting the yuan strengthen — as U.S. Treasury Secretary Timothy Geithner again urged on Thursday.

On balance, soothing comments by the National Bureau of Statistics suggested that the authorities are in no hurry to tighten policy, especially as the European Union, China’s biggest export market, is mired in financial difficulties.

“With the euro zone debt crisis, global commodities have been falling and that, to a certain extent, will help China ease inflationary pressure,” NBS spokesman Sheng Laiyun told a news conference on Friday after the figures were released.

Consumer prices climbed a slightly faster-than-expected 3.1 percent in the year to May, confirming a Reuters report on Wednesday and exceeding the official year-average target of 3 percent. Prices had risen by an annual 2.8 percent in April.

But Sheng said a low base of comparison last year explained 1.8 percentage point of the May increase.

Moreover, the cost of clothes, home appliances and vegetables — an important driver of Chinese inflation — were all falling, which should enable Beijing to meet its inflation target over the year as a whole.

“The trend is for price pressures to ease in the future,” Sheng said.

Reaction in the financial markets was minimal because all the figures had been widely leaked.


The statistics office reported that annual industrial output growth slowed to 16.5 percent in May from 17.8 percent in April, while year-to-date investment in urban areas in fixed assets such as flats and factories eased to 25.9 percent from 26.1 percent.

Zhang Lei, an economist with Bohai Securities in Tianjin, said China was unlikely to tighten policy further given that underlying inflationary pressure was easing and that strong economic growth would probably continue to moderate.

“In fact, if the economy cools down at a faster rate than expected, the government may have to relax its policies,” he said.

A 48.5 percent rise in year-on-year exports announced on Thursday had allayed concerns of an abrupt slowdown in China, a major driving force of global growth in recent years as Western economies floundered.

But Isaac Meng with BNP Paribas in Beijing argued that exports were a lagging indicator and warned of downside risks to growth as a result of a clampdown by Beijing on real-estate speculation and excessive local government borrowing.

He said annual gross domestic product growth was likely to slow to a range of 8 or 9 percent growth from 11.9 percent in the first quarter.

“We have seen a significant tightening year to date. This is a really proactive, strong tightening that addressed structural overheating in the property sector, industrial overcapacity and local fiscal excess,” Meng said.

That is not how some other China-watchers see things.


“Although CPI growth shows signs of stabilizing from last month, it has exceeded the PBOC’s limit. If it continues to rise in June, an interest rate increase is possible,” said Chen Xingyu, an analyst with Phillip Securities Research in Shanghai.

Unlike its counterpart central banks in India, Australia and Malaysia among others, the People’s Bank of China has kept its benchmark rates unchanged so far this year.

But Wang Hu with Guotai Junan Securities in Shanghai said he was penciling in a rate rise for September or October.

Liu Li-Gang and Zhou Hao with ANZ Bank in Hong Kong acknowledged that growth momentum had slowed somewhat because firms has finished replenishing inventories but said the economy was poised to return to an above-trend growth trajectory.

In a note for clients, they said domestic demand remained resilient, illustrated by an acceleration in annual retail sales growth to 18.7 percent in May from 18.5 percent in April.

Moreover, a wave of strikes and pay increases in the export strongholds of southern China suggested that pay increases would spread across industry, ramping up pressure on firms to raise prices to their customers.

Wholesale prices rose 7.1 percent in the year to May from April’s reading of 6.8 percent.

“We believe that as China is experiencing strong demand pressures, it is time for the PBOC to switch its policy priority from controlling credit to raising interest rates in order to counter the risk of runaway inflation,” the ANZ analysts wrote.

Figures released by the central bank showed the success of its efforts to normalize monetary policy after a record government-orchestrated credit spree last year to help the economy weather the global downturn.

The year-on-year pace of bank lending and money supply growth slowed and new local currency-denominated loans extended in May falling to 639.4 billion yuan from 774 billion in April.

“China’s May data confirmed a modest slowing in growth. But it did not add to fears of an abrupt correction in investment demand and leaves the policy call finely balanced,” Ben Simpfendorfer with Royal Bank of Scotland in Hong Kong, said.

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(Addition reporting by Zhou Xin and Michael Wei; Writing by Alan Wheatley; Editing by Kim Coghill)

China policy outlook murky after mixed bag of data