Should investors worry about inflation in China? – Fidelity

Ayesha Akbar, portfolio manager at Fidelity Solutions, discusses the latest Chinese inflation figure.

Key Quotes

“Today saw the release of China’s monthly inflation statistics, with the official consumer price index rising 2.3% year-on-year in April. Some might be surprised to see positive inflation coming out of China – after all, one of the dominant narratives around China has been whether it is exporting deflation having built up excess capacity in its industrial sector. On the domestic front, however, Chinese inflation has been reasonably robust, driven higher pork prices but moderated by falls in transport and communications prices.

Rising, falling or keeping steady?

“Property prices are picking up because of extra stimulus, with this feeding into inflation through higher rental costs. But this is unlikely to be an ongoing trend and the Chinese authorities will watch closely to ensure that this doesn’t hurt living standards too heavily.

“More important for the outlook on Chinese inflation is food prices, with these being a bigger component of EM inflation indices generally. Pork prices were up strongly compared to the previous year (33.5%), though less rapid growth in vegetable prices helped to keep a lid on inflation. In the medium-term, these are unlikely to continue rising at their current rate, and we would expect Chinese inflation to hold steady.

What about producer prices?

“Of course, inflation is not just a consideration for the consumer side of an economy, particularly in China. Producer prices have long shown a deflationary trend, partly due to the excess capacity which has been built up in the industrial sector. This has placed a heavy burden on those industries trying to repay debt, with revenue having been under constant pressure and less money to repay debt. The slowing of producer price deflation in April (-3.4% year-on-year) was both better than expectations and the March reading and should provide some relief to the industrial sector. The general pick-up in commodity prices will have helped here, with rising commodity prices not significantly impacting a manufacturer’s margins significantly but allowing prices to hold up. Whether the commodity price rebound is sustainable, however, is a another matter.

Conclusion

“Chinese inflation is an important area to watch when looking at the global economy, being able to tell us something about the pressures of both the consumer and industrial sector. This month’s reading has been positive on balance, but there is much else to consider when looking at the China story as a whole. For the meantime, I remain relatively positive on China, although there are wider concerns around the commitment of the authorities to pursue a sustainable rebalancing of the economy.”