Inflation in China runs at 5.3% in April arguing for at least one more interest rate increase

05/11/2011 11:30 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

China’s annual inflation rate dropped to 5.3% in April from March’s 5.4%. That 5.3% rate was above the 5.2% consensus projection by economists surveyed by Bloomberg. And it was still way above the government’s 4% inflation target.

In Shanghai stocks fell a modest 0.25% for the day. The futures market priced non-deliverable yuan forwards to indicate a 2.4% appreciation in the yuan against the U.S. dollar from the current price of 6.4926 yuan to the dollar.

I think both the stock and currency markets may be a bit too optimistic. The inflation data—and continued heavy bank lending in the month (banks made 740 billion yuan ($114 billion) in new loans)—say to me that the People’s Bank of China will raise interest rates at least two more times in 2011 and that the bank will allow the yuan to appreciate at a rate more like 3% to 5% than the 2.4% the market expects. The consensus among economists surveyed by Bloomberg is looking for one more interest rate increase in 2011.

The data below the headline number was very mixed, so mixed that you could build just about any interpretation you wanted from the numbers. Factory output growth slowed to 13.4%, the slowest rate of growth since November. To economists that was either a sign that the government’s anti-inflation policy was working to slow the economy or a danger sign that the policy was slowing the economy without doing much to control inflation. For the month retail sales grew by 17.1%, more slowly than the 17.6% growth expected by economists. Producer prices, an indicator of future inflation at the consumer level, climbed by 6.8% in April, down from the 7.3% growth rate in March. Money supply, as measured by M2, slowed to 15.3%.

On a less optimistic note, fixed asset-investment grew by 25.4% in the first four months of the year and export shipments climbed to a record in April. In other words there’s still no sign that China is making significant progress in shifting from an economy driven by exports to one driven by domestic consumption.

 

 

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