Econintersect: Look for China to start loosening monetary policy much more aggressively as inflation has collapsed well below the government target of 
4.0%. The annualized rate for February was sharply lower than the 4.5% figure for January and the three-year high of 6.5% last July. The inflation rate in China has not been this low since June 2010. The numbers for January and February were influenced by the Chinese New Year which fell in the first month and pushed consumption spending higher. Consumer spending was expected to be much lower in February, a hangover so to speak. Thus the average of the two months (3.9%) may be a better gauge of inflation. That would be very close to the target.
There is some official caution in pronouncements from the government. From the Financial Times:
But officials remain wary of a possible resurgence, especially in politically sensitive food prices, and this is likely to limit the extent of monetary easing this year unless growth collapses.
On Friday, Yan Qingmin, assistant chairman at the China Banking Regulatory Commission, told reporters that China still faces price pressures and will have to wait until the middle of this year to determine whether inflation really has been beaten.
The expectation is that there will be moves to improve liquidity. From Shanghai Daily:
“Apparently, inflation is cooling,” said Liu Yu, an Orient Securities Co trader. “We will see a wider range of selective loosening in the near future, such as tax cuts and credit offered to smaller firms as well as reductions in banks’ reserve requirement.”
The Producer Price Index, which tracks factory-gate inflation, was unchanged in February from a year earlier. The indicator rose 0.7 percent year over year in January, indicating little inflationary pressure in the pipeline.
The slower economic growth outlook for China and changes in the country’s growth plan were reported in GEI News just days ago. These growth concerns will obviously encourage more aggressive monetary policy just as soon as the lower inflation picture becomes clearer.
Sources:
- Chinese inflation rate drops to 3.2%) (Jamil Anderlini, Financial Times, 09 March 2012)
- China’s inflation cools in Feb, paving way for easing (Shanghai Daily, 09 March 2012)
- China Cuts Growth Target, Changes Objectives (GEI News, 06 march 2012)
Articles were found on Econintersect Asia Pacific newspaper page.
