There’s pain lurking behind China’s latest feel-good economic headlines. Although the monthly consumer inflation rate was surprisingly high, producer prices are falling. A monthly $5.35-billion trade surplus hides a decline in export growth rates. If the authorities in China considered rapid GDP growth the highest economic good, such signs of relative economic weakness might encourage them to introduce monetary and fiscal stimuli. But the reformers taking the reins in Beijing may be content to let the economy suffer short-term pain for the sake of longer-term gains.
March’s 3.6 per cent annual inflation rate is above last month’s 3.2 per cent, although still below the official four per cent target. The acceleration was driven largely by seasonal factors, most notably higher fresh vegetable prices. Less seasonal producer prices fell 0.3 per cent. That’s in line with HSBC’s survey of purchasing managers, which showed factory output falling in March for a fifth consecutive month.
The latest trade data bears out the weakening of exports seen in the same PMI survey. Quarterly numbers show slowing export growth. The strong rise in monthly US demand was encouraging, although the latest American employment data suggest future growth may be slower, but first-quarter exports to Europe fell below post-Lehman levels.
After Lehman, the government responded to slower growth with aggressive stimulus, including a massive increase in lending from state-controlled banks. Not this time. Loan growth has been slowing, despite two cuts in banks’ reserve ratio requirements. China’s leaders appear unconcerned. They may be defying predictions that reforms would be postponed during a transition of leadership. Perhaps both new and old simply agree that the investment-led growth model has made the economy uncoordinated, unbalanced and unsustainable, as outgoing premier Wen Jiabao put it. His likely successor Li Keqiang may be happy to restrain state-owned enterprises and banks, which benefit from financial repression and Communist party connections, and instead help private enterprises get better access to capital.
Of course, reading China’s policy tea leaves is always tough, but now it looks like anything less than a major spike in inflation or unemployment could earn little more than a shrug from Beijing.