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China battles to tame inflation dragon

Craig James
Thursday, May 13, 2010

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Chinese economic activity remained firm in April but showed few signs of accelerating. And while inflation remains under control, it clearly needs to be monitored closely.

Chinese consumer prices rose at a 2.8 per cent annual pace in April – the fastest pace in 18 months. But the lift in prices in the latest month was largely in line with expectations.

Chinese annual property inflation lifted from 11.7 per cent to 12.8 per cent in April.

China’s industrial production slowed in annual terms in April but the pace of retail sales rose modestly.

What does it all mean?

For most policymakers across the globe, inflation would be the least of concerns. But not so in China. The Chinese economy continues to grow at a firm clip, keeping the spotlight on inflation.

There were no great surprises in the latest batch of economic data from China. If there is a surprise, it is the fact that readings continue to come in very close to consensus expectations – something that is rare in Australia.

The good news is that the Chinese economy is growing at a firm pace, but it’s showing no signs of accelerating compared with the average pace of the past year. Indeed consumer prices edged up just 0.2 per cent in April, or a 2.4 per cent annual rate. Chinese statisticians believe that inflation can be held below three per cent over 2010, but the latest result does not leave a lot of margin for error.

Apart from inflation, Chinese authorities have also got a challenge in keeping the property sector under control. But while annual growth of property prices lifted again in April, supply is also responding with construction and land sales expanding at a strong pace. Encouragingly authorities have taken early steps to cool property demand. For instance, property investors require a 50 per cent deposit for second and subsequent property purchases.

China is both Australia’s largest trading partner and top export destination, so solid, sustainable growth is very much in our interests. The latest data points to further policy tightening ahead, further restraining investor interest in Australian mining and energy stocks.

What do the figures show?

Retail sales grew at an 18.5 per cent annual rate in April, the fastest pace in 16 months, although largely underpinned by higher inflation. Retail spending has been growing at double-digit annual rates for five years.

In real terms, the 15.7 per cent annual growth rate of retail sales was up just marginally on the 15.6 per cent annual growth pace from December to March but was down slightly from the average 16.3 per cent growth recorded in 2009.

Inflation hit 18-month highs in April. Consumer prices rose by 0.2 per cent in April after falling by 0.7 per cent in March. The annual growth rate lifted from 2.4 per cent to 2.8 per cent. Food inflation lifted from 5.2 per cent to 5.9 per cent in April while non-food prices rose from one per cent to 1.3 per cent.

Producer prices rose by one per cent in April after a 0.5 per cent gain in March. The annual rate lifted from 5.9 per cent to a 19-month high of 6.8 per cent.

Industrial output expanded at a 17.8 per cent annual pace in April, the slowest pace in six months and down from the 18.1 per cent annual rate in March. Steel production was up 31.5 per cent on a year earlier with washed coal up 29 per cent, and iron ore up 44.9 per cent.

China’s urban fixed asset investment, such as spending on roads and power plants, grew at a 26.1 per cent annual pace in the four months to April, down from 26.4 per cent over the three months to March and down from the 30.5 per cent annual growth recorded in 2009. Economists had tipped an annual growth pace of 26 per cent.

Total Yuan lending lifted by 774 billion Yuan in April to 43.4 trillion Yuan (median forecast was for lending to rise 570 billion Yuan). After slowing for five straight months, the annual growth pace of lending edged up from 21.8 per cent to 22 per cent in April.

Broad M2 money supply growth slowed for a fifth straight month, easing from 22.5 per cent to 21.5 per cent in March. Economists had tipped annual growth of 21.8 per cent.

Property prices in April across 70 cities in China were up 12.8 per cent on a year earlier, accelerating from the 11.7 per cent annual rate in March and 10.7 per cent in February.

Property investment in the January-April period was 993.2 billion Yuan, up 36.2 per cent on a year ago. Over 2009 as a whole, investment grew by 16.1 per cent. Floor space under construction over the period was up 31.7 per cent on a year ago while land purchases in the first four months of the year were up 26.4 per cent.

Passenger car sales slowed in April. Car sales were up 33.2 per cent on a year earlier to 1.11 million units. In March, car sales were up 63.2 per cent to 1.26 million units.

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 16 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?

Chinese authorities are poised to tighten policy further in coming weeks. While economic activity is not accelerating, authorities would no doubt be concerned at continued solid growth of property prices.

With Chinese economic policy set to be tightened further, Australian investors will no doubt remain cool on resource stocks.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published: Thursday, May 13, 2010


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