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Monday, May 16, 2005

Inflation Easing in China

This is interesting news:

"China said on Monday consumer price inflation had slowed to 1.8 percent in the year through April from 2.7 percent in March, the lowest rate in 20 months, easing fears about inflation amid rampant speculation on the yuan.

Easing inflation is seen a boon to Beijing, which is under heightened foreign pressure to revalue the yuan.

A high base of comparison in 2004, a stabilisation of food prices and companies’ willingness to cut profit margins rather than lose market share are keeping a lid on consumer inflation despite rising wages and high prices for inputs such as oil, economists say
Source: Financial Times

Rising consumer price inflation, which peaked last summer at a seven-year high of 5.3 percent, helped trigger the country’s first interest rate rise in nearly a decade last October. China analysts have generally been on the lookout for signs of quickening inflation because of the large quantities of foreign money entering China as people bet on a yuan revaluation. To keep the yuan fixed near 8.28 per dollar, Beijing has had to buy-up these foreign funds, and doing so tends to pump up the money supply. Hence the inflation reading is a sensitive one. What the present number indicates is that pressure from this source for revaluation may not be as strong as was thought.

Clearly the Chinese economy is enourmous, and ongoing inflation in, say, Guandong, can be perfectly compatible with deflation in other regions, so it is hard to draw general conclusions. That being said, any economy which is able to sustain a growth rate of around 9% without fuelling more than 1.8% inflation clearly has a long way to go before reaching full capacity output. Also since China is increasingly a major global supplier, the lack of inflation pressure in China should put the inflation danger in other parts of the world in some sort of perspective. Maybe, eg, the ECB are seriously overestimating likely inflation pressures in the eurozone.

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