Don’t Worry About Chinese Growth, Worry About PBC Tightening

While Chinese policymakers walk the tightrope between growth and inflation, concerns over slowing output growth are overdone, according to analysts at Nomura.  Inflation is expected to hover around the 5% mark with another rate hike coming in June, as the government continues to rebalance the economy by boosting consumption.

Many analysts have pointed at China’s tightening cycle to explain a lagging performance across various “emerging economies,” as the Red Dragon, along with Brazil, face the music and try to control what could become runaway inflation.  China’s economy is still “in a solid expansion stage,” according to Tomo Kinoshita and Chi Sun at Nomura. (Read Mantega: Inflation Under Control In Brazil As QE2 Pressures Real).

Despite having raised reserve requirements some 15 times in the past year and a half, as Forbes’ Robert Lenzner eloquently put it, loan growth and inflation haven’t stopped.  CPI eased only slightly in April to 4.3% year-over-year, compared with 5.4% in March.  New RMB loans hit 739.6 billion ($113.7 billion), up 8.9% from March.  China remains “in the early stages of a prolonged tightening cycle,” though, as inflationary pressures will persist. (Read Lenzner’s You Should Know What The People’s Bank Of China Is Up To).

The People’s Bank of China (PBC) will probably hike benchmark interest rates by 25 basis points in June, and once more in the third quarter, while reserve requirement ratios will be hiked an additional 150 basis points by year-end, according to Nomura.  Rising input costs of raw materials, excess liquidity, and utility price deregulation will put pressure on Chinese policymakers to continue to reduce overcapacity by rebalancing the economy to boost consumption. (Read Wen Jiabao Addresses Global Imbalances And Vows To Eradicate Chinese Poverty By 2020).

The PBC is taking “administrative measures to curb food inflation” along with “tighten[ing] measures on the property market” in its attempts to preemptively prick the bubble that has been forming in those markets.  Nomura expects CPI to average 4.9% in 2011 and 5.2% in 2012.  In the context of the 12 Five-Year Plan, Hu Jintao’s government will have the chance to “jump-start reforms to achieve higher quality and more sustainable growth.” (Read China As America’s Banker, America As China’s Farmer: Malthus Was Right).