China Inflation Looms

Accelerated consumer and industrial prices growth indicates nascent inflationary pressure on the Chinese economy, despite the good start to 2017.

The consumer price index rose 2.5% year on year last month, fractionally above market expectations of 2.4% and the strongest in two and a half years. Meanwhile, industrial inflation expanded even faster, with the producer price index, which measures costs of goods at the factory gate, hitting an over-five-year high of 6.9%, Xinhua reported.

From condiments to rentals, prices have increased in almost every subdivision of consumer goods and services, leading to concerns that China will likely see soaring prices after successfully taming inflation over the past years.

“Rising inflationary pressures have become a problem that cannot be ignored, which, some analysts caution, may lead to stagnation,” said Yin Zhongqing, deputy director of the Financial and Economic Affairs Committee of the National People’s Congress, the top legislature.

The pressures, caused by excess liquidity, had been subdued by lackluster industrial prices for years, but an unexpectedly strong commodity-driven payment protection insurance rebound since the end of 2016 changed this, according to Yin.

  CPI Rises

The People’s Bank of China, the central bank, on Friday issued a policy report for the fourth quarter of the last year, which called for attention to rising inflation expectations over lingering uncertainties.

“It still needs more observation,” Huang Yiping, central bank advisor and Peking University professor, said, “The CPI, whether rising rapidly or not in the future, influences macroeconomic policies.”

Price increases were well retained in China last year. The CPI only increased 2% from a year ago, far below the official 3% upper limit. The mild consumer inflation, along with a full-year PPI decline, prompted China to implement a prudent monetary policy with an easing bias last year.

Partly due to the overall price changes, the authorities are moving away slightly from their old policy stance.

 Monetary Policy 

At the annual Central Economic Work Conference in December, the central leadership decided China’s monetary policy will be “prudent and neutral” this year to keep appropriate liquidity levels and avoid large injections.

“A neutral state is neither tight nor loose,” Yi Gang, deputy governor of the PBOC, said at an economic forum held last week.

The central bank has already started to guide market rates higher. It has raised the short- and long-term lending rates between banks, a barometer of the overall lending climate, a move widely interpreted as a policy shift.

Beijing-based investment bank CICC expects the PBOC to continue phasing out monetary easing to rein in asset prices and inflation.

Despite the looming risks, analysts dismissed excessive concerns over prices this year, projecting CPI growth to likely retreat in February and PPI growth to peak in the first quarter.

China’s general inflation level will rise for the whole year, with the CPI at 2.6%, well under the government’s target, Li Xunlei, chief economist of Zhongtai Securities, said, adding “mild inflation will be boon for consumption.”

Besides, the stabilizing economy will give policymakers more room to control prices, Yin said.

Exports and imports staged strong rebounds in January, while official manufacturing purchasing managers’ index remained in expansionary territory for six consecutive months.

  Heavy Debt Load

Chinese banks lent more money in January alone than the annual GDP of South Africa, as borrowers rushed to take advantage of government policies intended to stimulate the economy with easy credit.

But the free-for-all has had unintended consequences, creating a tottering tower of unsustainable debt, with Beijing now trying to tighten monetary policy and reduce access to credit without bringing the entire edifice crashing down. Chinese debt exceeded 270% of the country’s GDP by the end of 2016, stoked by multiple interest rate cuts as well as the growth of the unregulated “shadow finance” credit sector which involves lending to already indebted companies.

Thanks in part to the easy credit, China’s economy—a key driver of global growth—expanded by 6.7% last year, with a construction boom and increased public spending on infrastructure.