Chinese money supply figures for February warrant continued concern about downside economic risks, while a larger-than-expected fall in inflation may partially reverse in March, delaying necessary significant policy easing.
The forecasting approach employed here emphasises the six-month rate of change of real narrow money – M1 in China’s case. This turned negative in January but was expected to rebound in February as New Year holiday timing distortions unwound. It did, but only back to zero. Similar weakness in mid 2008 preceded a rare contraction in industrial output – see first chart.
Broad money and loans are growing faster in real terms now than then but six-month changes seem to have peaked in December – first chart. A provisional verdict is that monetary trends are signalling a loss of economic momentum during 2012 following a brief revival late last year but the extent of the slowdown is unclear. The OECD’s Chinese leading index – released on Monday – will provide further clues.
Annual consumer price inflation of 3.2% in February, down from 4.5% in January, was probably flattered by a post-holiday fall in food prices occurring earlier this year than last, suggesting a partial reversal in March. Producer price inflation may also recover as firms pass on recent rises in input costs – second chart. Early further policy easing is expected but lingering inflationary pressures may prevent action on a scale necessary to avert a bumpy economic landing.
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