SINGAPORE, June 14 (UPI) -- Inflation in China may still be rising, but the likelihood of a dramatic rate hike action if inflation exceeds 5 percent is now receding as an array of other economic figures are showing signs of moderation.
"The possibility of rate hikes is still there but from a policy imminence point of view, we remain doubtful that the central bank is in a hurry to raise rates when the effectiveness of tightening measures has become more and more apparent with each passing month," said Chris Leung, economist at DBS.
Goldman Sachs China economist Hong Liang added "given a sharper-than-expected slowdown in industrial production, money and credit growth, we believe that the authorities will conduct a "wait and see" approach before considering an interest rate hike. Hence, we believe that there is unlikely to be any serious consideration of the issue till mid-July."
Recent monetary tightening measures in China are starting to show some results, and after weeks of worrying the country was facing a hard-landing, many economists are now brushing aside this scenario, saying a soft-landing is in the cards.
The decelerating industrial output, money and credit growth are certainly a boost for the soft-landing scenario.
"The May package of macroeconomic data looks much healthier than just one or two months ago, demonstrating the effectiveness of the tightening measures adopted by the central bank and central government," said Jun Ma, economist at Deutsche Bank.
The central bank has now raised three times the amount of cash that banks must set aside as reserves and the authorities have also introduced lending and investment curbs on investment projects, including those in aluminium, steel, cement and cars.
"The effectiveness of the tightening measures is clearly working on the monetary side of the economy. It is once again proven that industrial production and fixed asset investment also responded more rapidly to the administrative instructions than market means," noted Leung.
Industrial output growth slowed to 17.5 percent in May, compared with 19.1 percent in April and well below a consensus forecast of 18.8 percent, reflecting a slowdown in automobile and mobile phones output.
Meanwhile, broad money (M2) growth slowed to 17.5 percent in May from 19.1 percent in April. Lending growth also slowed to 19.0 percent from 20.4 percent.
This means money and credit growth are slowly converging on the central bank's 17 percent target.
Fixed-asset investment growth also slowed to a one-and-half year low of 18.3 percent in May from 34.7 percent in April. "Details have yet to be fully released to permit an assessment of whether the growth slowdown amounts to a hard landing. But, without a doubt, the May data suggest the measures to slow investment demand have worked," said Tim Condon, ING Financial Markets chief economist for Asia.
As long as fixed-asset investment's monthly year on year growth is controlled at the current pace (18 percent), its year to date cumulative growth will gradually moderate from the current 35 percent to around 25 percent in August, the mid-point of the government's annual target of 20-30 percent, Ma noted.
"This, together with recent indications from government officials, means that there will be no need for more administrative tightening measures in the coming months. A small rate hike, however, will still be possible in the coming 1 to 2 months to prevent a deterioration of inflation expectation and panic buying on rising headline CPI," Ma added.
As it had been expected CPI continued to rise in May, shooting further up to 4.4 percent from 3.8 percent in April. Retail sales rocketed up by 17.8 percent in May, after 13.2 percent in April, due to distortion by a very low comparison base last year due to the onslaught of SARS.
As an important improvement in the government's investor relations campaign, the State Statistical Bureau released for the first time the core inflation (non-food inflation) figure in May. Non-food inflation stands at only 0.5 percent, giving a clear signal that China's headline inflationary pressure is mainly food driven and transitory in nature, economists said.
The other good news is that the CPI actually fell 0.1 percent on a month on month basis and the National Bureau of Statistics believes inflation is largely under control and the official inflation forecast for 2004 is 3-4 percent.
"Consumer spending has remained buoyant and this is what the authority exactly wants to see. The tightening measures are not meant to depress consumer spending but specifically targeted at investment in selected industries," noted Leung.
