China pol­i­cy­mak­ers on alert as in­fla­tion creeps up

The Pak Banker - - COMPANIES/BOSS -

Af­ter a year of be­nign in­fla­tion con­sumer prices are tick­ing up in China amid an un­even eco­nomic re­cov­ery, pos­ing a dilemma for pol­i­cy­mak­ers.

The coun­try’s con­sumer price in­dex (CPI) rose to a higher-than-ex­pected 3.2 per­cent in Fe­bru­ary from a year ear­lier, com­pared with 2 per­cent in Jan­uary, rais­ing the ques­tion whether the Peo­ple’s Bank of China (PBOC) will tighten mon­e­tary pol­icy in the near-term to con­trol in­fla­tion, or fo­cus on sup­port­ing growth. Data re­leased over the week­end, in­clud­ing in­dus­trial pro­duc­tion and re­tail sales for Fe­bru­ary came in be­low an­a­lyst fore­casts, high­light­ing soft­ness in China’s eco­nomic re­cov­ery.

“A slow re­cov­ery, cou­pled with higher than ex­pected in­fla­tion and re­turn­ing cap­i­tal in­flows, leads to a tougher call for China’s pol­icy tone,” wrote Tommy Xie Dong­ming, econ­o­mist, trea­sury re­search & strat­egy at OCBC. While a rise in food prices, driven by the Lu­nar New Year hol­i­days last month, contributed to a jump in in­fla­tion, non-food price in­fla­tion in the com­bined Jan­uary and Fe­bru­ary pe­riod was higher than its his­tor­i­cal av­er­age, ac­cord­ing to No­mura, in­di­cat­ing that in­fla­tion has be­come broad based.

And econ­o­mists forecast that the pace of in­fla­tion will stay high for the rest of the year given ris­ing la­bor costs and abun­dant liq­uid­ity. Com­merce Min­is­ter Chen Dem­ing warned the coun­try is also at risk of im­port­ing in­fla­tion from higher com­mod­ity prices as a re­sult of the com­pet­i­tive de­val­u­a­tion of ma­jor cur­ren­cies.

Citi, for ex­am­ple, es­ti­mates av­er­age in­fla­tion may top 3.5 per­cent in the fourth quar­ter of this year. Last week, the Chi­nese government low­ered its in­fla­tion tar­get for 2013 to 3.5 per­cent from 4 per­cent for the pre­vi­ous year. Av­er­age in­fla­tion in 2012 came in be­low tar­get at 2.6 per­cent. Yi­fan Hu, chief econ­o­mist at Haitong In­ter­na­tional Re­search be­lieves mon­e­tary pol­icy in the main­land will re­main ac­com­moda­tive through the first half of the year, be­cause “the cur­rent state of China’s domestic econ­omy has not re­cov­ered a high level of dy­namism yet.”

The cen­tral bank will likely wait un­til the sec­ond half of 2013 to hike the of­fi­cial lend­ing rate, ac­cord­ing to econ­o­mist pre­dic­tions. In 2012, the PBOC cut in­ter­est rates twice, in June and July, to boost growth.

“Chi­nese CPI rose quite sharply. We are not chang­ing our view that the im­pli­ca­tion will be mon­e­tary tight­en­ing (but) we are keep­ing the sec­ond-half 2013 time hori­zon be­cause only by then price pres­sures will be strong enough to war­rant ac­tion,” said Dar­iusz Kowal­czyk, se­nior econ­o­mist, Asia ex-Ja­pan at Credit Agri­cole, who ex­pects two rate cuts in the sec­ond-half.

In the mean­time, the PBOC is likely to fo­cus on drain­ing liq­uid­ity in the sec­ond quar­ter through open mar­ket op­er­a­tions, Kowal­czyk added.

The cen­tral bank has be­gun with­draw­ing liq­uid­ity in re­cent weeks, drain­ing a net 253 bil­lion yuan ($40.6 bil­lion) from the bank­ing sys­tem through its open mar­ket op­er­a­tions in Fe­bru­ary, ac­cord­ing to me­dia.

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