CHINESE ECONOMY IN EARLY 2012

HIGH INFLATION IN EARLY 2012

China's inflation rebounded in January as food prices soared, renewing pressure on the communist government to control surging living costs while it tries to boost slowing economic growth, AP reported. Consumer prices rose 4.5 percent over a year earlier in January, up from the previous month's 4.1 percent, data showed Thursday. Food prices jumped 10.5 percent, accelerating sharply from December's 9.1 percent rise. The rebound in inflation broke a monthslong decline from July's 37-month high of 6.5 percent. It will complicate efforts by Beijing to stimulate the cooling economy by easing curbs on lending and investment. [Source: AP, February 8, 2011]

Inflation is politically dangerous for the ruling Communist Party because it erodes economic gains that underpin the party's monopoly on power. Last year's price spike stoked frustration among a public that is angry about pervasive corruption, a yawning gap between rich and poor, pollution and product safety scandals.

The food price rise was driven by a 25 percent gain in the cost of the pork, which is the staple meat in China. In December, pork prices rose 21.3 percent. Communist leaders have promised pro-growth policies for entrepreneurs after the plunge in global demand and lending curbs caused a wave of bankruptcies, raising the threat of job losses and unrest. The Cabinet promised to try to shift more of the country's prosperity to the poor by increasing the required minimum wage for the lowest-paid workers by at least 13 percent each year through 2015.

China's Inflation Falls in February 2012 as Food Prices Ease

China's inflation fell sharply in February, giving Beijing more leeway to stimulate its slowing economy, AP reported. Consumer price inflation declined to a 20-month low of 3.2 percent from January's 4.5 percent, data showed Friday. Inflation in politically sensitive food costs declined even more markedly, falling to 6.2 percent from the previous month's 10.5 percent. The decline gives Beijing room to cut interest rates or ease other curbs to stimulate slowing economic growth without concern about igniting a new price spiral. The World Bank and International Monetary Fund have warned China and other developing countries to prepare for a possible global slowdown this year. [Source: Joe McDonald | Associated Press, March 9, 2012]

"China's February price data makes it clear that inflation pressures are easing," said Moody's Analytics economist Alaistair Chan in a report. "This gives the government scope to ease monetary policy." Inflation had declined steadily from July's 37-month peak of 6.5 percent but rebounded in January, sparking concerns that pressure for prices to rise had not been extinguished. The government's official target calls for holding inflation below 4 percent this year.

Liu Chunhui, a Shanghai physician, complained that prices are still rising rapidly even though the official figures show the rate easing. He said a market where he shops raised the price of bread 20 percent last month. "The data don't match what I feel," said Liu, 46. "Prices are still going up, especially for food, vegetables, bread and cake, milk and so on."Lei Shujie, a freelance designer, said she has cut back on eating out because restaurants are shrinking portion sizes to cope with higher costs. "The quantity of the dish is obviously less than before, although the price is still same," said Lei, 27. "I just feel that money now is not as valuable as before."

Consumer inflation for the combined January-February period was 3.9 percent, the National Bureau of Statistics said. Analysts often look at the two months together to compensate for the weeklong Lunar New Year holiday, which falls at different times during that period each year and distorts data on factory production and consumer spending.

China's Growth Slows to 8.1 Percent in First Quarter of 2012

Tom Orlik and Bob Davis wrote in the Wall Street Journal: “China's first-quarter economic growth slowed to a lower-than-expected 8.1 percent, the lowest since the first quarter of 2009, as a slowdown in exports and real-estate investment complicated China's efforts to guide its economy to a soft landing. China's growth was still above the 7.5 percent target set by the government, and its economy remains a bright spot in a world economy looking for drivers. China's resilient growth and strong public finances stand in contrast to the U.S. and Europe, where unemployment remains elevated and high public debt limits the scope for a stimulus. [Source: Tom Orlik and Bob Davis, Wall Street Journal, April 2012]

“But the 8.1 percent figure---compared with expectations of 8.3 percent growth according to economist surveys---is a marked slowdown from 8.9 percent in the fourth quarter of 2011. Song Yu, China economist at Goldman Sachs, said the growth rate was disappointing. "Growth in the first two months was weak. We had some loosening of monetary and fiscal policy in March but it wasn't enough to save the quarterly number," he said. [Ibid]

“Still, an increase in the contribution of consumption to growth provided a positive counterpoint. Consumption contributed 76 percent to GDP growth in the first quarter, up sharply from 51.6 percent in 2011. The share from investment---including infrastructure, real estate and other big projects---fell to 33.4 percent from 54.2 percent. Those numbers suggest that attempts to rebalance growth away from dependence on capital spending and toward a bigger role for consumption may already be showing results. [Ibid]

China's Growth Slows Even More to 7.6 Percent in the Second Quarter of 2012

AP reported: “In the April-June quarter in 2012 China’s economic growth slowed to a new three-year low. The world’s second-largest economy grew by 7.6 percent in the three months ending in June over a year earlier, down from the previous quarter’s 8.1 percent. That was the lowest since the first quarter of 2009 during the depths of the global financial crisis. [Source: The Associated Press, July 14, 2012]

“China’s slowdown could have global repercussions, especially at a time when the United States and Europe are struggling. Lower Chinese demand could send shockwaves through Asian economies that supply industrial components to its vast manufacturing industry and exporters of oil, iron ore and other commodities such as Australia, Brazil and African nations. [Ibid]

“Other indicators, though, including strong June bank lending, which is closely tied to business activity, suggest the low point of the decline might be past, analysts said. “The Chinese economy has already bottomed out in the first two quarters,” said Xiao Li, an economist at Industrial Bank in Shanghai. “It is not certain whether or not there will be a strong upward rebound. But at least the economic growth rate will stop coming down,” Xiao said. [Ibid]

“The slump raises the threat of job losses and political tension. That comes at a politically difficult time for the ruling Communist Party, which is trying to enforce calm ahead of a planned once-a-decade handover of power to younger leaders. China’s export growth has fallen steadily and consumer spending has weakened despite stimulus measures that include two interest rate cuts since the start of June. The government also is pumping money into the economy through higher investment by state-owned industry and more spending on low-cost housing and other public works. [Ibid]

IMF Says China's Economy Reached “Soft Landing”

In July 2012, Elaine Kurtenbach of AP wrote: “China has achieved a "soft landing" in its economic slowdown, the IMF says while cautioning that more sweeping reforms are needed to ensure healthy growth in the longer term. In a report on its website, the IMF praised China's leaders for adjusting policies to help counter the malaise plaguing the global economy that has also slowed robust growth in China and other emerging nations. [Source: Elaine Kurtenbach, AP, July 24, 2012]

“China's economy seems to be undergoing a soft landing, though global headwinds are increasing," said the report, issued after IMF consultations with Beijing. It notes that China has reduced some imbalances in the world's second-biggest economy, such as its once huge trade surplus, and brought inflation under control. But it pointed to risks from excessive bank lending and urged more effective regulation to ensure financial stability. [Ibid]

“Overall we are very confident that China is experiencing what we would call a soft landing," Markus Rodlauer, deputy director of the IMF's Asia & Pacific Department, said. "This means growth of about 8 percent. This is less than it was in the past but still it compares very favorably to what is happening around us," he said. The IMF forecasts growth in 2013 of 8.5 percent. [Ibid]

China Inflation Eases in Mid-2012

Boris Cambreleng of AFP wrote: “China's inflation eased to 3.0 percent in 2012 May as other data released indicated a slowdown in the world's second largest economy, giving Beijing more room to ease monetary policy to stimulate growth. It was the lowest rise in the consumer price index since June 2010, and below market expectations for a 3.2 percent rise, according to a poll of 15 economists by Dow Jones Newswires. [Source: Boris Cambreleng, AFP, June 9, 2012]

“Meanwhile industrial output grew at a slower-than-expected 9.6 percent year-on-year in May, a faster clip than the previous month but still near three-year-lows. "The combination of falling inflation and weak industrial data will provide more room for the authorities to loosen policy," Goldman Sachs economist Yu Song told Dow Jones Newswires. "There will remain room for the People's Bank of China to further cut the (bank) required reserve ratio and interest rates.” [Ibid]

“While production from the country's millions of factories and workshops was stronger than the 9.3 percent expansion seen in April, it was still lower than forecasts of a 9.9 percent gain in a Dow Jones Newswires poll of 14 economists. Chinese exporters have been particularly hard hit by the crisis in Europe, their largest market. [Ibid]

“Alistair Thornton, Beijing-based China economist for IHS Global Insight, told AFP that further stimulus was likely in the coming, "Growth in China is slowing rapidly, as price pressures continue to come off. That should act as a spur for government policy to combat the slowdown," he said. "We think it is very likely that there will be another interest cut through the rest of the year," while there was "clearly a lot more room" for cuts in bank reserve ratio requirements. [Ibid]

“China has set itself a target of keeping annual inflation within four percent this year, fearing that surging prices carry the potential to cause social unrest as people grumble about paying more. "Inflation is easing as expected, or easing even faster than expected, which is mainly due to economic weakening not only in China, but also around the world," said UBS economist Wang Tao. [Ibid]

Surprise Interest Rate Cuts in Mid-2012

In early June 2012, Kevin Yao and Nick Edwards of Reuters wrote: “China delivered twin surprises on interest rates, cutting borrowing costs to combat faltering growth while giving banks additional flexibility to set competitive lending and deposit rates in a step along the path of liberalization. China's first rate cut since the global financial crisis underlined heightened concern among policymakers worldwide that the euro area's deepening debt problems are threatening economic growth. [Source: Kevin Yao and Nick Edwards, Reuters, June 7, 2012]

“It's obviously a very strong signal that the government wants to boost the economy, given the current weakness, especially in demand," Qinwei Wang, economist at Capital Economics in London, told Reuters. The 25 basis points cut brings the official one year borrowing rate to 6.31 percent and the one year deposit rate to 3.25 percent. [Ibid]

“The move confounded the call of many economists who thought the People's Bank of China (PBOC) would refrain from cutting policy rates this year despite wanting to support growth. The European Union is China's single biggest foreign customer and faltering demand there has led to worries about the knock-on effect to domestic consumption if industrial activity slows dramatically. [Ibid]

“This is a crucial point for Beijing, which wants to see growth solidly underpinned before a once-a-decade leadership change at the top of the ruling Communist Party, due towards the end of this year. It has been wary about setting off a fresh round of price hikes that could put social stability at risk. High inflation has preceded political tension in China in the past - something the government is desperate to avoid as the leadership change has already been complicated by the purge of populist politician Bo Xilai and the murder scandal surrounding his fall. [Ibid]

“In early July 2012, China, the euro zone and Britain all loosened monetary policy in the space of less than an hour, signalling a growing level of alarm about the world economy. Of the three, the surprise move was from Beijing which lowered its lending rate by 31 basis points to 6 per cent following an interest rate cut just a month before. [Source: Reuters, July 6, 2012]

Banking Reforms in Mid-2012

Kevin Yao and Nick Edwards of Reuters wrote: “While the cut to borrowing costs should help in the near term to shore up an economy on course for its weakest full year of expansion since 1999, it is the liberalization measure that is likely to have the greatest longer-term repercussions. The PBOC said it was giving banks the freedom from June 8 to set deposit rates as high as 110 percent of the benchmark rate and offer rates on new loans for as little as 80 percent of official policy rates, an additional 10 percentage points from the current 90 percent limit. [Source: Kevin Yao and Nick Edwards, Reuters, June 7, 2012]

“Commercial banks until now have been barred from charging rates on deposits higher than the benchmark set by the central bank. "It's a significant move," Wang said. "It's a first step in rate liberalization and it increases the returns for households. The lower floor for lending rates creates more competition between banks. So banks cannot guarantee their profits as before.” [Ibid]

“The PBOC has cut RRR for the biggest banks by 150 basis points from a record high of 21.5 percent in three moves since November last year, after a two-year tightening campaign to rein in inflation and cool steaming economic growth. That has freed an estimated 1.2 trillion yuan ($190 billion) for new lending as authorities in Beijing have sought to stimulate economic activity without resorting to a major fiscal spending package like 2008's initiative. [Ibid]

“The liberalization move meanwhile signals that reformers are in the ascendant as the new leadership takes shape. Sources close to the central bank and regulators told Reuters in April that China was poised to crank open its tightly controlled capital markets in a series of small, but swift and significant steps over the coming 12 months. Allowing some leeway for competitive setting of interest rates is a sign that China is making good on its pledges to allow the markets a greater role in the making of policy. "The adjustments of the floating range of deposit and lending rate is an important move towards liberalizing interest rates," said Wang Hu, analyst at Guotai Junan Securities, Beijing. [Ibid]

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.

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© 2008 Jeffrey Hays

Last updated August 2012

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