China’s Inflation Is Down…Now What?

03/09/2012 4:12 pm EST

Focus: GLOBAL

Jim Jubak

Founder and Editor, JubakPicks.com

One can never be too sure when it comes to China, but with inflation now solidly below government targets, Beijing certainly has options, writes MoneyShow’s Jim Jubak, also of Jubak’s Picks.

Really great news out of China this morning, for investors worried that the country’s economic growth is about to stall—although you might have to dig beneath the negative headlines to find it.

The good news is that inflation in China dropped to an annual rate of 3.2% in February. Two reasons this is so important:

First, inflation had increased to a 4.5% annual rate in January, the first upward tick since July. That had raised fears that inflation was about to start upward again.

I argued at the time that the January increase was a statistical fluke that resulted from the shift of the Lunar New Year holiday from February in 2011 to January in 2012. But that was just my argument. It’s good to have it confirmed.

(Of course, this same argument means that the February rate isn’t actually as low as it seems, since in 2011, the big inflationary demand from the Lunar holiday was in February.)

Second, the 3.2% inflation in February ran well below the 4% target set by the government for 2012. That means the People’s Bank of China has lots of room to stimulate the economy without fear of blowing through the inflation target.

I think the February inflation number keeps China on track for more reductions in the bank reserve ratio in the coming months, and an interest-rate cut in June or July.

The other numbers today, the one the headlines are emphasizing, show that the economy does indeed need a boost:

  • New bank loans at 712 billion yuan ($113 billion) were well below economists’ estimates of 750 billion yuan, according to Bloomberg’s survey of economists.
  • Money supply, measured by M2, rose by 13% in February 2012 from February 2011, but that was still below the 14% target recently set by Beijing, and below the 13.6% growth in M2 in 2011.
  • Industrial output in the first two months of 2012 rose by just 11.4%, the smallest increase for January and February since 2009.

To me, weak growth and lower inflation adds up to an interest-rate cut by the People’s Bank.

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

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