China Lowers Inflation, Increases Trade Surplus
The global retrenchment in prices for food, energy and raw materials helped boost China's trade surplus and reduce inflation in August, alleviating two key difficulties for Beijing and giving authorities more room to support the economy if needed.
China's Customs agency said imports increased 23.1% in August from a year earlier, slowing sharply from the 33.7% growth rate in July as the decline in commodity prices cut the country's monthly bill for things like crude oil, iron ore and soybeans. Export growth also slowed but by a smaller margin, notching a 21.1% increase. That left a trade surplus, or margin by which exports exceeded imports, of $28.7 billion, 15% more than a year earlier and a record.
At the same time, domestic prices for important food items like pork and cooking oil have stabilized or even fallen in recent weeks. The rapid increase in prices for such goods starting last year was the main cause of China's inflation rate surging to a 12-year high of 8.7% in February. But last month the consumer-price index was just 4.9% higher than a year earlier, the National Bureau of Statistics said Wednesday, coming in lower than analysts' expectations and below July's 6.3%.
Lower inflation gives China's policy makers more room to maneuver as they try to judge to what extent the slowdown in exports is translating into lower consumption and investment domestically -- and how much they should do about it.
The fall in commodity prices 'removes one of the big uncertainties for the outlook' for China's economy, said Ben Simpfendorfer, an economist for Royal Bank of Scotland. 'Lower food prices is good news for the household sector, and lower oil prices is good news for the corporate sector. And it makes life a little bit easier for the central bank.'
At least, the combination of falling headline inflation and declining coal and oil prices makes it easier for Chinese authorities to adjust state-controlled domestic energy prices. The government has raised retail gasoline prices once and electricity prices twice this year to alleviate widespread shortages that were becoming a further drag on growth.
The pace of adjustments has still been slower than industry analysts think is needed because of authorities' concerns about adding to high inflation -- concerns that may now be receding. 'We believe the softening of CPI inflation has opened a window for the government to make the much-needed adjustments in energy prices,' Goldman Sachs economists said in a research note.
More consistent energy supplies would certainly support growth. Authorities loosened bank lending at the beginning of August, telling banks they could extend 5% more credit this year. A cut in the standard corporate-tax rate to 25% from 33% took effect in January, and some export-tax rebates have been selectively increased in recent weeks.
China's export growth has averaged around 22% this year -- a solid performance given the slowdown in global growth, but slower than China's export growth last year. With more weakness likely ahead for the U.S., Europe and Japan, exports are widely expected to slow even further.
China's slumping stock prices and weak real-estate market have also dented people's confidence in the economy and have led to many calls for the government to do more to shore up growth. Yet some analysts have cautioned that with the economy still expanding by around 10%, any big stimulus risks reigniting inflation and asset bubbles.
'If it is one thing China's economic policy has consistently done well, it is to support high levels of growth. The risk is that they do it a little too well in coming quarters,' said Glenn Maguire, Asia economist for Societe Generale.
Investment spending has slowed this year but is still relatively fast. The National Bureau of Statistics released separate figures Wednesday showing that investment in fixed assets, like factory equipment and buildings, was up 28% in August from a year earlier, coming in somewhat slower than 29.5% in July. But it isn't clear whether the figure represents a real shift in momentum, since restrictions on construction projects during the Beijing Olympics likely slowed activity in August.
Inflationary pressures remain. Nonfood inflation, China's closest equivalent to a measure of core prices, didn't slow in August, remaining at 2.1%. And China's producer-price index continues to show accelerating inflation, rising 10.1% from a year earlier in August after a 10% gain in July.
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Andrew Batson
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