China’s newly released July inflation index reveals a three-year high, coming in at 6.5%, up from 6.4% in June. From Forbes:
China is not winning its inflation fight and that could mean a return to monetary tightening in the months ahead. China is the world’s steam engine at the moment, and any additional pressure to slow the economy could lower global growth estimates going forward.
China’s core inflation index came in at 6.5% in July, up a tad from 6.4% in June, but breaking a three year record nonetheless. The National Bureau of Statistics in Beijing reported on Tuesday that rising food prices were to blame. Average food inflation rose a whopping 14.8% in July from a year ago. The price of pork, a staple food in China, soared by nearly 57% last month, the National Bureau of Statistics reported.
News of manufacturing slowdown in China, coupled with the news about inflation, has caused Chinese stocks to fall to a twelve month low. From Xinhua:
Chinese stocks dropped to a 12-month low on Tuesday on concerns over the strength of global economic recovery and China’s stubbornly high inflation.
The benchmark Shanghai Composite Index fell 0.03 percent to close at 2,526.07. The Shenzhen Component Index rose 0.02 percent to finish at 11,315.08.
Combined turnover dropped to 198.52 billion yuan (about 31.02 billion U.S. dollars) from 214.8 billion yuan the previous trading day.
Losers outnumbered gainers by 588 to 322 in Shanghai and 837 to 460 in Shenzhen.
The country’s Consumer Price Index (CPI), a main gauge of inflation, surged 6.5 percent in July year-on-year, its highest level in 37 months, the National Bureau of Statistics said on Tuesday.
A faltering global recovery will make it harder for the government to curb inflation, as a possible third round of quantitative easing by the U.S. Federal Reserve is expected to worsen global liquidity.
However, despite concerns that the Chinese government may increase interest rates again to curb inflation, other analysts say that interest rates may remain stable, in an attempt to boost exports. From Bloomberg:
China may join Asian nations from South Korea to India in delaying interest-rate increases as the global stock rout encourages officials to put growth ahead of tackling inflation.
The People’s Bank of China will leave borrowing costs unchanged for the rest of this year, according to eight of 10 analysts surveyed yesterday. Economists’ median forecast is for South Korea to extend a pause for a second month tomorrow, while Indonesia stayed on hold yesterday.
“Usually the Chinese government stops doing anything when there’s chaos around, that’s the instinct,” said Andy Xie, an independent analyst who was formerly Morgan Stanley’s chief Asiaeconomist. Interest rates will be “on hold for the time being, until global markets are recovering,” he told Bloomberg Television in Hong Kong.
The nation’s key one-year lending rate is 6.56 percent after three increases this year, the most recent in July.