No Inflation Relief for China

06/13/2011 3:17 pm EST

Focus: GLOBAL

Jim Jubak

Founder and Editor, JubakPicks.com

Don’t get buried by this week’s data dump from China. The numbers certainly have the potential to move financial markets around the world.

China weighs in on Tuesday, June 14, with its monthly inflation and industrial-production update. In April, China’s annual inflation rate ticked down to 5.3%, from 5.4% in March.

With food prices still climbing, economists are predicting that inflation will edge back up to 5.5% for May, according to Bloomberg. That will keep inflation above the People’s Bank of China’s target of 4%, and feed into fears that the central bank will have to keep raising bank-reserve requirements and benchmark interest rates to slow the economy and fight inflation.

Worry that the bank will slow the economy too much got an unpleasant boost from figures released today, which showed both bank lending and China’s money supply grew at a slower pace in May. New bank loans fell to 552 billion yuan ($85 billion) from 639 billion yuan for May 2010.

(There may be less to this decline than meets the eye. Faced with pressure to reduce bank lending, borrowing has shifted to non-bank sources. It’s not clear whether or not actual lending is falling or if the numbers show simply a shift in lending sources.)

However, even with the deceleration, yuan-denominated loans outstanding were 17% higher than a year ago. As measured by M2, money supply grew by 15.1%. That was down from 15.3% growth in April and marked a third consecutive monthly drop in the rate of growth.

Tomorrow will show whether this slowdown in the rate of bank lending and money-supply growth is reflected in the growth rate for industrial production in China. Industrial production grew at an annual rate of 13.4% in April, down from the 14.8% annual rate in March. Economists surveyed by Bloomberg are looking for a drop to 13.1% in May, in the figures to be reported tomorrow.

If all this data comes in as expected, it will leave investors in China facing a continuing conundrum. Growth may be slowing slightly, but not quickly enough to bring inflation under control.

How serious is China about fighting inflation, a year before 2012 brings major transitions in national leadership?

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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