- China's April data showed signs of a slowdown in economic activity coupled with a pickup in inflation.
- The slowdown has been mostly policy induced to avoid overheating and reduce inflationary pressures.
- Further tightening measures in coming months are likely to remain administrative in nature; stronger measures such as higher interest rates are still expected to take place only by the second half of the year.
China's policy tightening is beginning to bear fruit and the likelihood of the economy overheating continues to diminish. Inflation nevertheless is heading upwards. Policymakers will have to walk a fine line to balance strong growth with stable inflation, and they are likely to do this with further administrative measures rather than tougher measures such as interest rate increases.
Growth in China's
industrial production and
fixed asset investment continued to cool in April, although both remained at strong double digit rates. Car production grew at a historically strong pace of 36.9% y/y in April, but slowed from a 51.5% gain in March, helping to drag overall production growth lower. Demand for cars appears to be gradually becoming saturated and lower tax subsidies this year are also cooling demand.
Production growth of inputs such as steel, cement and electricity remained strong, a partial result of the government's infrastructure projects. But growth in these areas is likely to slow in line with fixed investment growth as infrastructure projects such as rail lines and other utilities near completion. Steps to cool bank lending may also be slowing the rate of new projects.
Inflation
Inflation in year on year terms continues to head upwards. Part of this is due to a weak base from a year ago: Moody's Economy.com's
standard inflation index shows that consumer prices have yet to reach the previous peak in August 2008 because of the brief bout of deflation that followed.
But inflationary pressures are clearly present.
Consumer inflationary pressures are coming from food (up 5.9% y/y in April) and housing (up 4.5% y/y) at this stage. Producer price inflation is presently being driven by mining and quarry costs (up 30.9% y/y) and raw materials costs (up 13.6% y/y). Mining costs may be rising as the government forces the closure and consolidation of some coal mines to improve safety standards. Rising prices for iron ore are forcing steel producers to pass on costs.
Given that inflationary pressures are concentrated in specific sectors, the government remains committed to dealing with the problems on an administrative basis. This can be seen most clearly in the housing market. The government's residential property price index for 70 major cities grew at a record pace in April, at 12.8% y/y. This is not just due to a weak base: price growth in month on month terms also showed an upward trend in 2009, although that trend flattened in the early months of 2010.
Cooling property
Surging property prices in this cycle seem predominantly a demand side issue, and the government has
issued various regulations in an attempt to limit demand. In April, down payments for mortgages of first homes bigger than 90 square metres were set at 30%. Minimum down payments for second mortgages were increased to 50%, up from 40% prior, and interest rates for them are now required to be at least 110% of benchmark (first mortgage) rates.
2012, May 18 
0 comments
Print
Digg