Lower than expected inflation in China puts off currency, interest rate changes

02/11/2010 10:04 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

  Consumer prices in China rose for the third month in a row in January. But the 1.5% year-over-year increase was less than the 2.1% increase economists had expected.

 That has led stocks in China to rally for a third day on speculation that lower-than-expected inflation will put off interest rate increases and other policies designed to slow the economy. The consensus of a survey of economists by Bloomberg conducted before the most recent inflation numbers pegged June for an initial interest rate increase.

 No surprise that steel makers, a sector that needs the economy to grow flat to prosper because of rampant overcapacity, and property developers, a sector that needs cheap money, led stocks higher.

 The relatively low inflation reading also increased speculation that China will delay steps to allow its currency to resume its controlled appreciation.

 Beijing put an end to the controlled float of the renminbi, pegging the currency to the U.S. dollar, to protect the country’s exporters during the depths of the global economic crisis. The country has been under increasing pressure lately to let the renminbi appreciate because of complaints from trading partners that the currency is under-valued giving Chinese exporters an unfair advantage.

 One potential window for announcing any change in the peg occurs in late March after the meeting of the National Peoples Congress and before a state visit by China’s leaders to Washington in April. Any announcement, thinking goes, would occur before the state visit so that it would not look like China was responding to U.S. pressure.

 With the new inflation numbers, speculation grants increasing odds to a June window near the June 26 meeting of leaders from the G20 economies in Canada.

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