China: There's Good News and Bad News

10/21/2010 3:28 pm EST


Jim Jubak

Founder and Editor,

Good news plus bad news on China’s economy added up to bad news for China’s stocks today, October 21.

The good news was that China’s economy grew at an annual rate of 9.6% in the third quarter. That was slightly ahead of the 9.5% that economists surveyed by Bloomberg had expected.

That 9.6% growth rate, however, was the lowest for the year after a 10.3% annual rate in the second quarter and an 11.9% rate in the first quarter. 9.6% represents solid growth—showing that China’s economy isn’t about to stall—and yet the slight slowdown is encouraging since it represents a retreat from the clearly unsustainable 11.9% growth of the first quarter. If you want to believe that China has a chance to engineer a soft landing for its economy, today’s growth number was good news.

That’s more than I can say for the inflation number for the quarter. Consumer prices jumped 3.6% in September from the same month in 2009. While that only matches the consensus forecast from economists, it shows that inflation is still accelerating at a time when the People’s Bank is throwing the kitchen sink at the problem. The central bank raised benchmark interest rates this week for the first time since 2007. In August, inflation ran at an annual rate of 3.5%. Both the August and September numbers are above the government’s target for inflation of 3%.

Yesterday, October 20, stocks rose in Shanghai as Chinese investors convinced themselves that the move by the People’s Bank meant that the government would not act further to slow inflation or to reduce speculation in the real estate market. (For more on yesterday’s thinking, see this post.)

Today, October 21, they’ve reversed course. The belief today seems to be that the inflation numbers are strong enough so that the People’s Bank will raise benchmark rates again this year and increase bank reserve requirements again as well.

Full disclosure: I don’t own shares of any company mentioned in this post.

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