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A Dark Day for Chinese Inflation--Heard on the Street

10 Jan 2017 5:12 am
By Nathaniel Taplin 

If the Chinese economy is a supertanker plowing through the waves, the narrative on the economy is more like a small dinghy, tossed about by every new data release. Expect Tuesday's release, of inflation data for December, to be a case in point.

Factory-gate prices rose at the fastest pace in more than five years, which is likely to renew analyst speculation about interest-rate increases by the People's Bank of China--just a few months after consensus had the nation irredeemably locked in a deflationary death spiral.

Don't buy it. While it's obvious that Chinese policy makers are now tightening credit on the margins--allowing bond and money-market yields to move higher and raising mortgage down payments--an increase in either the benchmark rate or reserve-ratio requirement remains unlikely.

There are two main reasons for this. First, the December jump was all about commodities. Factory-gate prices in the steel and fuel-refining sectors were up 35% and 17% from a year earlier, respectively, against just 5.5% for producer prices as a whole. Part of that is a low base of comparison, as most industrial commodities bottomed out last winter, along with Chinese producer price inflation in aggregate. That will start to fade as the year progresses.

Also, metal and coal prices have shown signs of losing momentum in recent weeks as China's real-estate sector has slowed. Core consumer-price inflation, which excludes volatile food and energy prices, was flat in December at 1.9%.

Second, China's economic growth is likely to start flagging again sooner than many anticipate. It will likely hold up reasonably well for the first half of the year, as the labor market stabilizes and the lagging impact of last year's stimulus continues feeding through, but despite massive refinancing over the past year, industrial companies and local governments remain in precarious financial shape.

A too-abrupt tightening would cause more problems than it would solve. Policy makers are unlikely to risk capsizing the boat.

Write to Nathaniel Taplin at nathaniel.taplin@wsj.com
 

(END) Dow Jones Newswires

January 10, 2017 00:12 ET (05:12 GMT)

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