Chinese Inflation Creeping Back

04/09/2012 3:55 pm EST

Focus: GLOBAL

Jim Jubak

Founder and Editor, JubakPicks.com

Those who were hoping that China would have lots of room to stimulate its economy must be disheartened by this weekend’s news, writes MoneyShow’s Jim Jubak, also of Jubak’s Picks.

I know the big news in the US this morning is the delayed-reaction sell-off in US stocks from Friday’s disappointing jobs report for March. The US economy created just 120,000 jobs—subject to revision next month—when all eyes were on the 200,000 level.

But the overnight news from China is actually more important to investors. China’s National Bureau of Statistics reported an increase in inflation in March, to an annual rate of 3.6%. That was a jump from a 3.2% annual rate in February, and also above the 3.4% median forecast by economists surveyed by Bloomberg.

The big culprit was a 7.5% (annual rate) increase in food-related inflation. That was a step up from the 6.2% rate for food-related inflation in February.

Why are the March inflation numbers from China so significant?

The big driver for the gradual move up in Chinese stock prices in 2012—the Shanghai Composite Index is up 4.6% for 2012—has been the expectation that the government and the People’s Bank of China would undertake a program of fiscal and monetary stimulus to combat a slowdown in China’s economic growth rate.

Before the weekend’s inflation news, expectations included another series of cuts in the bank reserve ratio—as much as 2 full percentage points in 2012, according to some analysts—and cuts to China’s bank lending rate as well. And the thinking has been that inflation—at February’s 3.2% rate—was running so far below the government’s 4% target that Beijing had a lot of room to stimulate the economy.

But the March jump in inflation to a 3.6% annual rate just ate up half of the available margin. That has raised fears among traders that the government and central bank won’t be as aggressive in stimulating the economy as hoped.

We’ll get our next read on how fast growth is slowing in China on Friday, April 13, when the government reports on industrial production and on first-quarter GDP.

The consensus among economists surveyed by Bloomberg is that China’s economy grew at an 8.4% rate in the first quarter. That would be down from the 8.9% rate in the fourth quarter of 2011, but still well ahead of the government’s target of 7.5% growth for 2012.

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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