China Latest Growth, Inflation Raise Rate Rise Fears

By John Richardson

CHINA’S soaring fourth-quarter GDP (gross domestic product) growth – and the release of the latest inflation statistic – has heightened fears among economists that interest-rate rises will be necessary, risking collapse in house prices if it’s not managed skilfully.

Inflation rose to 1.9% in December last year from 0.6% in November, according to this same article in today’s Financial Times.

As we’ve mentioned before on this blog it was higher deposit rates in late 2007 that caused the country’s last economic contraction as property values and the stock market fell.

On this occasion an inflationary head-of-steam is being built up through not only rising real-estate prices (they were up in Shenzhen by 90% last year, for example, indicating that much more moderate nationwide statistics don’t reflect localised inflation hot spots), but also higher food and utilities costs.

Just a few weeks ago the betting seemed to be on no rate rises before the second half of this year.

Now with the release of this latest GDP growth number, as we had suggested might happen earlier this week when we quoted the Lex column in the Financial Times, some pundits now think a rate rise before then is likely.

Higher deposit and/or borrowing rates - to follow fiscal tightening measures that have already been taken - would have another negative consequence for China: A stronger Yuan, denting export competitiveness for an economy that still remains around one-third dependent an overseas trade, despite all the talk about booming local demand.

A growing view seems to be that the Yuan will arise by around 3% against the US dollar. This would also dampen some of the speculation that has boosted petrochemicas demand (see details in link in paragraph above).

Yesterday we quoted Mazlan Razak, petrochemicals consultant with DeWitt & Co in Kuala Lumpur, as saying: “The last time China tightened liquidity in 2007 we saw a dip in PE imports. The imports fell to 4.6m tonnes in that year from 4.9m tonnes in 2006.”

This is obviously the impact on only one polymer, and so tread with great caution when making plans for this year.

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