China's inflation drops closer to 4% target

12/13/2011 2:33 pm EST


Jim Jubak

Founder and Editor,

Good to see something trending as predicted—and on the positive side of the ledger for investors.

Inflation in China fell to an annual rate of 4.2% in November, a 14-month low, China’s government statistics bureau announced last week. Even economists optimistic that China’s inflation rate, which peaked at 6.5% in July, will hit 4% by the end of the year were surprised by the November drop. The median forecast among the 35 economists surveyed by Bloomberg called for an annual rate of 4.5% in November.  No economist in the survey predicted an inflation rate as low as 4.2%.

Those of us trying to figure out when the People’s Bank of China will start cutting interest rates—and thus spark a stock market rally in Hong Kong and Shanghai—have pegged achieving a 4% inflation rate as a minimum requirement for the central bank. (China’s Shanghai stock market is down 17% in 2011.) That would put inflation at the government’s target and clear the way for the bank to concentrate on measures to make sure that economic growth doesn’t stall.

The People’s Bank reduced its reserve ratio requirements for banks, a step toward easing, on December 5. I’m looking for another two or three reductions in the reserve ratio before the bank starts to cut interest rates.

On the growth front the news continues to show a slowdown in China’s economy. Industrial output rose at just a 12.4% rate in November. That was the lowest growth rate since August 2009.

China’s makers of economic policy meet are meeting now for their annual conference. I think it’s very premature to expect an overt tilt toward monetary easing to emerge from the conference, but we could see a statement that shifts goals from the current “stabilizing prices” to “stabilizing growth.” That would be another step on the road to easing in the second half of 2012.

The rumor yesterday was that the conference would announce a cut in tax rates for 2012 to stimulate the Chinese economy. That rumor has some credibility given that tax revenues have run higher than expected so far in 2011.

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