Slow Going for China’s Transition

05/11/2011 3:23 pm EST


Jim Jubak

Founder and Editor,

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, as 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 US dollar, from the current rate of 6.4926 yuan.

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%, instead of the 2.4% the market expects. Most of the economists surveyed by Bloomberg are expecting one more rate increase in 2011.

The data below the headline number was also 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.

Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.

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