China inflation picks up but threats on hold – for now

Higher prices have stoked fears of inflationary risks but the increases could lose steam in the absence of underlying demand, economists say

PUBLISHED : Wednesday, 15 February, 2017, 9:03am
UPDATED : Wednesday, 15 February, 2017, 9:03am

Consumer inflation raced to its highest level in China in nearly three years last month, but the world’s second-biggest economy is not facing a major inflationary threat – at least for now, analysts say.

The National Bureau of Statistics said on Tuesday that the consumer price index jumped 2.5 per cent last month – its highest level since May 2014.

At the same time, the producer price index rose 6.9 per cent, its highest level in five years and above the rate of economic growth.

Higher inflation generally leads to tighter monetary policy to control price rises.

The central bank has already sought to head off financial risks and the threat of asset bubbles from those rises by telling lenders to rein in credit.

There are signs the orders are working, with new bank loans in January coming in at a lower-than-expected 2 trillion yuan (HK$2.25 trillion).

Liu Xuezhi, an economist with Bank of Communications in Shanghai, said January’s price surge might lose steam in coming months.

China inflation climbs to 2.5 per cent, higher than forecasts

The authorities had tried to cut excess capacity in some areas and this “will affect product prices in some sectors, but the impact on industry as a whole will be limited”, Liu said.

NBS official Sheng Guoqing attributed the price rises in January to the Lunar New Year holiday and oil prices.

As families came together over the festive season, pork prices were up 7.1 per cent year on year in January while the price of fruit increased 4.8 per cent.

Transport and tourism charges also jumped 9.9 per cent. Diesel and petrol prices jumped around 5 per cent year on year amid the rebound in international crude oil prices.

Commerzbank senior emerging markets economist Zhou Hao said the rise in factory-gate prices reflected the government’s ­proactive fiscal policies and there was no significant flow-on effect from PPI to consumer inflation yet.

ING chief Asia economist Tim Condon said the data did not have any implications for monetary policy conditions.

“The authorities have taken a wait-and-see attitude to check if it is a one-off factor or lasting inflation,” he said.

China industrial inflation surges on coal and steel price rally

Condon said the big bounce from food and travel prices in January would recede in the months ahead and oil prices, which feed through to transport prices, were unlikely to go much higher.

“March will probably be the last month we get really a big increase coming through from oil … We could be close to the peak of PPI inflation,” Condon said.

According to ING projections, oil prices could fall to US$45 a ­barrel by the end of this year because there is no fundamental support.

Morgan Stanley Huaxin Securities chief economist Zhang Jun agreed, saying price hikes are “not supported by end-user demand, not to mention the risk of an economic slowdown”.

“China’s major threats are still capital outflows and yuan depreciation amid the [US Federal Reserve’s] rate hike, domestic asset bubbles and structural imbalances,” Zhang said.