Has China Finally Tamed Inflation?

11/18/2011 6:30 am EST

Focus: GLOBAL

Jim Jubak

Founder and Editor, JubakPicks.com

China’s inflation rate dropped in October, says MoneyShow’s Jim Jubak, and if the economy has finally slowed down, it could set the stage for some monetary easing by early next year.

As economists were projecting (or maybe hoping), inflation in China dropped to an annualized 5.5% rate in October. This is down from 6.1% in September, down from the peak of 6.5% in July.

Inflation is going in the direction that the Chinese government has been trying to get it to go by tightening interest rates, raising bank reserve requirements, and trying to slow the economy. All this is backed up by other figures that show, well, industrial production growing at a little over 13%—less than people expected, less than in September.

We’re seeing transactions in the real estate market. We’re seeing real estate prices start to come down for the first time in the last six months. All this points to a Chinese economy that is indeed slowing.

Now, of course, the worry is that it will slow too far, but the Chinese government, from where I sit, seems to be aware of this problem and to be taking the first baby steps toward making sure that this slowdown doesn’t become too much of the slowdown. They have started to try to get banks to lend more to small- and medium-sized companies, the ones that have been most seriously affected by tightening of credit standards.

My guess is that what we’re going to see is inflation come down further in November and December. If it indeed does come down significantly in November and the economy continues to slow, I think by December we might actually get—well, not an interest-rate cut, I think it’s too soon for that—but a loosening of the reserve-ratio requirements that the People’s Bank has imposed on the large banks in China. So, maybe around January—the Chinese New Year, something like that—we might actually see those start to reverse.

(Later on in 2012, if that doesn’t really provide the burst of growth that China wants (and I don’t think it would), we would start to see maybe an interest-rate cut or two. At that point, I think we can look for a rally in the Chinese stock market.

My calendar for that still says the middle of 2012, roughly, for the time when we start to see interest-rate cuts and a rally in China. I think it is a long time to sort of sit here and wait for this all to happen, especially as things in the developed markets of the United States and Europe continue to look kind of iffy, but that, I think, is about the schedule that we can look for, and there is really no use hoping that it will be faster.

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