China Inflation Data
Chinese policy makers initiated a monetary tightening cycle in October 2010 to slow inflationary pressures. Nine subsequent raises to the reserve requirement ratio (RRR) for banks (Fig 1.1) has lifted the RRR 450 basis points. Concurrently, the one-year lending rate (Fig 1.2) has been raised 125 basis points with five hikes. There has been, however, an eight-week pause in the cycle - the longest gap since the tightening initiated. I expect the pause suggests policy makers are seeking an end to the tightening cycle rather than embarking on further tightening measures.
China inflation data released last night is critical to this decision:
• CPI rose 6.5% year on year above last month's 6.4% and ahead of consensus 6.3%.
• PPI rose 7.5% year on year above last month's 7.1% and ahead of consensus 7.3%.
• Industrial production fell from last month's +15.1% to +14.0% year on year.
• Retail sales fell from last month's +17.7% to +17.2% year on year.
Tonight, China releases further economic data on exports, imports, and trade balance.
CONCLUSION: I expect that last night's CPI print of +6.5% has a high probability to be a cyclical peak. If correct, and one month from now evidence is provided that CPI has moderated, then the tightening cycle initiated since last fall is over. Given the global growth moderation, an end to China tightening would be welcomed. In this "Baseball Season of Frustration 2,' the villains control the plot and we need a hero. I still expect China will be a hero, not a villain.
Fig 1.1 China Banking Reserve Requirements since August 9, 2010
Fig 1.2 China 1-Year Lending Rate since August 9, 2010
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