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10-02-2015, 10:30 PM
China inflation falls, threat of currency war
Angus Grigg AFR correspondent
640 words
11 Feb 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.
Fiscal policy PPI was weaker than expected
Shanghai | The slowest pace of Chinese inflation in five years could put Beijing back at the centre of the global currency wars, as expectations rise that Beijing will move to depreciate the yuan.
The chance of China moving on its currency increased on Tuesday after consumer prices rose at an annual rate of just 0.8 per cent in January, due to weak commodity and food prices.
The Producer Price Index, a gauge of prices at the wholesale level, also came in weaker than expected.
The PPI fell by 4.3 per cent, marking its 35th month in the negative, as Chinese manufactures struggle with overcapacity and a tepid export market.
The recent run of weak data out of China and rumours of an imminent devaluation have led the United States to warn its major trading partners on Tuesday not to manipulate their currencies.
The US used the G20 finance ministers' meeting in Istanbul to issue the warning, and said there were signs of currency manipulation going on, according to Reuters.
A draft copy of the communique from the meeting shows the world's top 20 economies have pledged to "act decisively" on monetary and fiscal policy.
The Chinese currency has strengthened over recent years, even as growth has slowed, eroding the competitiveness of the export sector which is one of the country's biggest employers.
HSBC estimates the yuan is 35 per cent above its long-term average and 10 per cent above this level if adjusted for gains in productivity.
Statistics like this have led to rumours that the central bank will expand the currency's trading band in the coming weeks.
The state-run Securities Times newspaper said on Tuesday the move could be made around the time of the Spring Festival holiday, which begins on February 18.
At present, the Chinese currency trades in 2 per cent daily band to the US dollar. The Securities Times said this band could be widened to 3 per cent.
Lawmakers in the US are already moving to head off a major devaluation from China, preparing legislation that will place sanctions on any trading partner using an artificially low currency to gain a competitive advantage.
In the early 2000s, the US and China regularly argued over the value of the yuan, and the issue flared again during the last presidential election when Republican challenger Mitt Romney vowed to brand Beijing a "currency manipulator".
Tuesday's weak inflation readings followed data earlier in the month which showed China's manufacturing sector declined for the first time since September 2012.
Ahead of the release of the official Purchasing Managers' Index, China's central bank cut the amount of capital that banks were required to keep aside in a bid to spur activity. It was the first time the People's Bank of China had lowered the Reserve Ratio Requirement in more than two years.
The RRR was cut by 50 basis points to 19.5 per cent for major banks.
This followed a cut in official interest rates in November last year.
"The weak inflation profile suggests deflation has become a real risk for China, thus paving the way for further monetary policy easing," said the chief China economist at ANZ, Liu Li-Gang.
He expects the central bank to lower official interest rates by 25 basis points to 5.35 per cent in the first quarter of this year.
Mr Liu has also forecast a further 50 basis point cut to the RRR in the second quarter.
The more aggressive fiscal policy stance comes as the government attempts to keep growth above 7 per cent this year.
China grew at 7.4 per cent in 2014, its slowest pace in 24 years.
Fairfax Media Management Pty Limited
Document AFNR000020150210eb2b0007g
Angus Grigg AFR correspondent
640 words
11 Feb 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.
Fiscal policy PPI was weaker than expected
Shanghai | The slowest pace of Chinese inflation in five years could put Beijing back at the centre of the global currency wars, as expectations rise that Beijing will move to depreciate the yuan.
The chance of China moving on its currency increased on Tuesday after consumer prices rose at an annual rate of just 0.8 per cent in January, due to weak commodity and food prices.
The Producer Price Index, a gauge of prices at the wholesale level, also came in weaker than expected.
The PPI fell by 4.3 per cent, marking its 35th month in the negative, as Chinese manufactures struggle with overcapacity and a tepid export market.
The recent run of weak data out of China and rumours of an imminent devaluation have led the United States to warn its major trading partners on Tuesday not to manipulate their currencies.
The US used the G20 finance ministers' meeting in Istanbul to issue the warning, and said there were signs of currency manipulation going on, according to Reuters.
A draft copy of the communique from the meeting shows the world's top 20 economies have pledged to "act decisively" on monetary and fiscal policy.
The Chinese currency has strengthened over recent years, even as growth has slowed, eroding the competitiveness of the export sector which is one of the country's biggest employers.
HSBC estimates the yuan is 35 per cent above its long-term average and 10 per cent above this level if adjusted for gains in productivity.
Statistics like this have led to rumours that the central bank will expand the currency's trading band in the coming weeks.
The state-run Securities Times newspaper said on Tuesday the move could be made around the time of the Spring Festival holiday, which begins on February 18.
At present, the Chinese currency trades in 2 per cent daily band to the US dollar. The Securities Times said this band could be widened to 3 per cent.
Lawmakers in the US are already moving to head off a major devaluation from China, preparing legislation that will place sanctions on any trading partner using an artificially low currency to gain a competitive advantage.
In the early 2000s, the US and China regularly argued over the value of the yuan, and the issue flared again during the last presidential election when Republican challenger Mitt Romney vowed to brand Beijing a "currency manipulator".
Tuesday's weak inflation readings followed data earlier in the month which showed China's manufacturing sector declined for the first time since September 2012.
Ahead of the release of the official Purchasing Managers' Index, China's central bank cut the amount of capital that banks were required to keep aside in a bid to spur activity. It was the first time the People's Bank of China had lowered the Reserve Ratio Requirement in more than two years.
The RRR was cut by 50 basis points to 19.5 per cent for major banks.
This followed a cut in official interest rates in November last year.
"The weak inflation profile suggests deflation has become a real risk for China, thus paving the way for further monetary policy easing," said the chief China economist at ANZ, Liu Li-Gang.
He expects the central bank to lower official interest rates by 25 basis points to 5.35 per cent in the first quarter of this year.
Mr Liu has also forecast a further 50 basis point cut to the RRR in the second quarter.
The more aggressive fiscal policy stance comes as the government attempts to keep growth above 7 per cent this year.
China grew at 7.4 per cent in 2014, its slowest pace in 24 years.
Fairfax Media Management Pty Limited
Document AFNR000020150210eb2b0007g