Fisher Investments Editorial Staff
Emerging Markets, Inflation

China’s Not Choking

By, 12/14/2010

Story Highlights:

  • Chinese November economic data came in ahead of expectations—as did inflation.
  • China tightened monetary policy in 2010 to fight inflation—but such tightening shouldn't surprise in the midst of a booming economy.
  • Overtightening is always a risk, but China has every incentive to keep the economy humming.

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China's November economic data (industrial manufacturing, urban fixed asset investment, and retail sales) came in ahead of expectations, as did its inflation. November prices rose 5.1% y/y—higher, but not drastically above the Chinese government's 4% inflation target. Inflation was driven mainly by spiking food prices (11.7% y/y in November) on a weak fall harvest due to flooding and could prove temporary.

But to preempt inflation, China has tightened monetary policy all year via target price controls, looser currency controls, and higher bank reserve requirements. Continued inflation could lead to more tightening. China is an important global economic driver, and the specter of a monetary mistake has some folks worried. A mistake is a plausible risk. The monetary authorities aren't perfect—none are. What if the government panics, gets overzealous, and chokes growth?

A major monetary error in China would be troublesome, but so far we can't find evidence of one. Action has been measured, and growth continues. Much negative attention is given to the tightening—but it really isn't all that surprising given its booming economy and elevated inflation. If anything, it's prudent. Further, China isn't only tightening. Although the central bank hiked reserve requirements today, it also unexpectedly kept the target interest rate steady (this year's earlier rate hike was the first since December 2007). Meanwhile, rumors are next year's loan quotas (the government closely directs bank lending) will be at the high end of expectations (7 trillion yuan or higher).

Chinese monetary policy has been very easy for the last few years (in line with the rest of the world). Left unchanged, that could realistically lead to damaging inflation—so current policy seems reasonable. Overtightening is always a risk. But China has every incentive to keep the economy humming—and so far, that's exactly what's happening.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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