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Wednesday, April 16, 2008

China Inflation and GDP Growth March 2008

Inflation dropped back slightly in March, but it would be premature to begin to draw any substantial conclusions for the future of Chinese inflation from this. Consumer prices rose 8.3 percent in March over March 2007, down only slightly from February's 8.7 percent, which had been the highest rate in nearly 12 years, according to the National Bureau of Statistics this morning. The cost of food is up 21 percent since the beginning of the year.

The price spike that began in mid-2007 has been blamed on shortages of pork, grain and other food. The government is trying to increase output by raising farm subsidies and curbing exports, but that effort was hampered by snowstorms in January and February that wrecked crops.

And March inflation is still well above the 4.8 percent target that Premier Wen Jiabao has set for this year. Li Xiaochao, the statistics bureau spokesman, said that to meet Wen's target, inflation has to fall below 4.2 percent each month for the rest of the year.

On Wednesday, the central bank raised the amount of money Chinese banks must hold in reserve by 0.5 percentage points to a record high of 16 percent in a new effort to curb lending.

China's economic growth slowed in the first quarter and the world's fourth-largest economy grew 10.6 percent in the first three months of 2008 from a year earlier, the National Bureau of Statistics said in a news conference in Beijing. This was an easing from 2007, when China's economy expanded by 11.7 percent in the first quarter and 11.9 percent for the year, according to data from the bureau.

Industrial output, a key measure of the activity level in China's plants and factories, was up 16.4 percent in the first quarter from a year earlier. It compared with 18.3 percent growth in the first quarter of 2007.

China's fixed-asset investments, the main indicator of state-funded spending on new productive capacity, rose 24.6 percent in the first quarter of 2008 from a year earlier, the bureau said. This figure did not seem to follow the general slowing trend, as in the first three months of 2007, it had risen by 23.7 percent.

One reason for the acceleration in fixed asset investments might well be that such investments are fuelled by continued ample liquidity in the system. That liquidity, in turn, is boosted by incoming foreign funds, in the form of exports earnings, foreign direct investments, and speculative money banking on short-term gains.

Chinese retail sales rose 20.6 percent in the first quarter from a year earlier, according to the bureau. The growth was 5.7 percentage points higher than in the same three-month period last year. A large chunk of this increase simply reflects the fact that the inflation level was up from the 3% level in Q1 2007, since retail sales data are given in nominal terms, but even stripping out the 8% inflation, real sales are up 12.6% year on year, which certainly isn't a slowdown and may well indicate a slight increase.

One analysts response, widely quoted in the press coverage is "Now we really need some rate hikes,". But this is more complicated than it seems, since - as reported here - China's foreign-exchange reserves, the world's largest, surged to $1.68 trillion at the end of March, adding pressure on a government already trying to prevent money inflows from fueling inflation already at an 11-year high. Currency holdings expanded 40 percent from a year earlier, according to data from the People's Bank of China. The assets grew a record $153.9 billion from the end of December, after a $94.6 billion increase in the fourth quarter.

China has systematically held off from raising interest rates after six increases last year as the U.S. Federal Reserve cuts borrowing costs and the fear grows that an increase in yield differentials would only attract even more liquidity. China last raised interest rates at the end of December when the benchmark one-year lending rate was increased by 0.18 percentage point to a nine-year high of 7.47 percent. This compares with the 2.25% which is currently on offer for the Federal funds rate. It isn't really so obvious to me at least that what China most needs is another round of interest rate rises, although what to do about the inflation is a real head-cracker.

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