China’s Inflation Rate Lowers; Monetary Policy in Focus

 China’s inflation rate lowered to 4.1% in December but it was slightly higher level than the 4.0% level that analysts were expecting. The 4.1 % CPI (consumer price index) level confirms that China’s inflation level has been in a steady decline month over month. December’s CPI level is the lowest level in 15 months. China’s CPI rate for November was 4.2% compared to 5.5%  in October and 6.5 % in July.

Significance of Low Inflation

 Inflation has a direct correlation with the decision to print money and enact monetary policies across China to sustain the Chinese economy. Inflation is too many dollars chasing too few goods. The lowering of China’s inflation rate consecutively month over month suggests that China’s economy could use some monetary easing (more dollars printed) to help stimulate future growth in China. The latest CPI number out of China for December suggests that the Chinese government should be more concerned about harm done to their economy through deflation rather than inflation.

Housing prices in China have been in a steady state of decline. Yesterday, Barclay’s broached the topic of China’s commerical real estate bubble as a result of overbuilding with new skyscrapers. Many new skyscrapers in China are still under construction with financing still being worked out.  If China overbuilds and business demand does not keep up with their growing supply of commerical real estate, China’s bubble real estate may end up popping and follow the same troubled path of Dubai’s storied real estate bubble. 

China has over 50% of the world’s skyscrapers that are under construction, representing an 87% increase. Barclay’s Skyscraper Index, which tracks a correlation between tall building construction and an impending financial crisis is being reviewed with China. (Note* I plan to write a post about this topic soon and will post it here).

China’s GDP Growth Slowing

Next week China will release their 4th quarter GDP numbers for 2011. Chinese yearly GDP numbers are clearly following the same downward trend as their CPI numbers.

China’s 4Q GDP for 2010 was an impressive 9.8%

2011 1 Q 2011 was 9.7%, 2 Q 2011 was 9.5%, 3 Q 2011 was 9.1.

Analysts are currently expecting 8.7% for China’s 2011 4 Q GDP number which will be released next week.

Declining global growth and recessionary fears out of Europe will likely keep China’s GDP growth estimates for 2012 in a modest range compared to previous quarters in 2011 and 2010.

Monetary Policy Easing in China

Jin Ulrich, Chair of Global Markets for JP Morgan, told Bloomberg’s Linzie Janis earlier this morning that she expects China to engage in some monetary easing. “Central authorities will incrementally ease monetary policy and use a more aggressive fiscal policy to stimulate their economy. This time around the policy appears to be more nuanced compared to 2008-2009 when the government launched a large economic stimulus program” Ulrich said. 

She believes that the Chinese government will be more targeted, selective, and take incremental steps with future easing measures.

Europe’s Bond Auctions

In a few hours, Europe will auction 17 billion of bonds. Spain will auction 5 billion of debt while Italy will auction 12 billion euros.  The ECB (European Central Bank) will decide if they will cut interest rates. They are not expected to raise interest rates. European markets are currently trading higher in advance of Europe’s bond auction. Yields on Italy’s 10 yr. bond is currently down .32 to 6.67% (below the worrying 7%  level) while Spain’s 10 year is down .11 to 5.21%. The Euro is up .36% at 1.275.







About Johnathan Schweitzer 1648 Articles
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