Inflation in China hit 8.7% in February, a 12-year high. The National Bureau of Statistics said the strong price growth – up from 7.1% in January – was largely due to the fierce winter weather and seasonal price rises over the Chinese New Year holiday.
Food prices were up 23% year-on-year, compared to 18% in January. Vegetable prices rose 46%, compared to 14% in January. Meat rose by 45% and edible oils 41%. Non-food prices rose by only 1.6%.
We receive our fair share of comment on this from the China-watchers at the investment banks and we much appreciate it. Here is a brief rundown on what some of them had to say.
1) Jing Ulrich, chairman of China equities at JPMorgan:
Implications for Monetary Policy:
With inflation viewed as a prime economic and political issue, and in light of recent comments by the central bank governor that there is “definitely room” for more interest rate hikes, we believe there is some likelihood of a further hike in response to this latest surge in inflation. China’s monetary tightening program has been complicated by the Fed’s recent aggressive cuts in interest rates. A widening interest rate differential between the yuan and other currencies could attract unwanted capital inflows. As such, we would expect only a modest increase if the central bank opts to raise interest rates at this juncture.
Implications for Markets:
Higher than expected inflation figures have made investors nervous about the growth prospects for companies that face rising costs. With prices rising for a range of commodities – from grain to iron ore – midstream processors, such as electricity generators and refiners, will face considerable margin pressure in 2008. The beneficiaries of higher inflation remain the resource suppliers – many of which are outside China.
2) Jonathan Anderson, global emerging markets economist at UBS:
It is crucially important to note that nothing has changed in the "pattern" of inflation. Core goods and services prices did not accelerate, most food items did not accelerate: nearly all of the February increase came from a surge in fresh vegetable prices and a further surge in fresh meat prices. As a result, we see no reason to change our underlying call, i.e., (i) current high inflation is temporary, (ii) the headline numbers should fade in the second half of the year, and (iii) the authorities have no incentive to take draconian demand tightening measures in the
meantime (see first attachment above for the gory details). In other words, this is not the end of the world for China. On the other hand, we’re not out of the woods yet – and we see plenty of room for weakening sentiment over the next quarter or so. March, April and May inflation numbers will likely stay high, and we could easily see further near-term policy reactions: a rate hike or two, continued price controls, lots of alarmist talk in the press.
3) Andy Rothman, China macro strategist at CLSA:
We continue to expect food prices to begin fall by this summer, with CPI to rise by about 5% for the full year. The flip side of our optimism on consumer prices is our strong pessimism on manufacturing margins, as producers will be unable to pass on more than a fraction of rising input costs. And with the economy already slowing, we do not expect Beijing to implement a tighter monetary policy. Instead, we expect Beijing to continue talking about tight monetary policy, as part of an intensive campaign to talk down inflation expectations.
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