Figures posted yesterday by China's National Bureau of Statistics (NBS) showed inflation climbed past the government’s target last month, rising 4.9 percent on a year earlier. I asked IHS Global Insight’s China analyst, Alistair Thornton, for his take on the latest figures and what he thought was behind the increase.
He told me:
‘January’s slight uptick in inflation—up to 4.9 percent year-on-year from December’s 4.6 percent, but still down from November’s 5.1 percent year on year—was once again driven by food price gains, supported by steadily rising non-food prices. Food prices were back to double-digit rises, at 10.3 percent year on year from December’s 9.6 percent, while non-food prices also gained, up to 2.6 percent year on year from December’s 2.1 percent. Gains in both food price inflation and non-food price inflation haven’t, interestingly, resulted in gains in headline inflation.
‘The probable cause of this? The NBS has carried out its five-yearly re-formulation of the CPI basket, with the food weighting reduced and housing-related weighting increased, to reflect shifting consumption habits. Indeed, the market knew that a reformulation was due, and at a time of politically-sensitive food price gains, it was unlikely that a reformulated CPI basket would produce a much higher inflation figure.’
I also asked him what these figures might mean for policymakers. He also told me:
‘There’s still clearly far too much liquidity in the system, with 1.04 trillion yuan of new loans pumped out in January, which despite the traditional front-loading of loans through the year as quotas refresh, makes a mockery of the government’s tightening rhetoric. M2 growth is still too high, despite its slight pullback to 17.2 percent year on year in January.
‘Interest rates and reserve ratio requirements have indeed been raised, and tinkered with—asymmetric interest rate hikes, for example, squeezing banks’ spread between the loan and deposit rates—but stronger movement on curbing bank lending is needed if liquidity-driven inflationary pressure is to be dampened.
‘There have been lots of market rumours about new approaches to regulating bank lending, but the People’s Bank of China has yet to set a clear line. Still, there seems to be plenty of non-liquidity-driven price pressure, notably from strong international commodity prices and persistent droughts, which feeds directly into higher headline inflation, thanks to food’s high—but now slightly reduced—share of the CPI basket.’