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For China inflation hawks, it's time to watch pigs

Wednesday, 28 Aug 2013 | 3:22 AM ET
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The rapid rise in pork prices is developing as the main threat to currently subdued inflation in China, according to analysts at Bank of America Merrill Lynch.

The price of pork, viewed as an essential part of the Chinese diet, has risen in recent weeks on higher seasonal demand. Tight supply meanwhile has been exacerbated by unusually hot weather conditions, which hinder transportation of pigs over long distances.

(Read more: Shanghai suffers hottest July in more than 100 years)

Bank of America Merrill Lynch (BofAML) said that pork prices are up 13 percent from where they bottomed in mid-May, and, according to Chinese media quoting the Ministry of Commerce, prices rose 10 percent between the fourth week of May and the fourth week of July.

"The CPI [consumer price index] inflation trend deserves a careful examination, and within that, pork prices are among the most important to watch for," analysts at BofAML said in a note released Tuesday.

"Recall that almost every episode of China's inflation spikes in the past few years was driven by food prices – case in point, the escalating pork prices in 2007-08 and 2011, and rising vegetable prices in late-2010."

Don't Worry About Chinese Inflation: Pro
Stephen Schwartz, Chief Economist for Asia at BBVA, says the end of China's growth model isn't upon us yet, and there's still room for stimulus. He said China will stick to its target for this year.

Inflation in China has remained relatively subdued, rising an annual 2.7 percent in July, the same as the increase in the previous month, but focus could return to price pressures as the economy shows signs of bottoming out from a slowdown, analysts say.

(Read more: China remains entrenched in producer price deflation)

"In year-on-year terms, pork price inflation could accelerate from 3.0 percent in July to around 10 percent and contribute 30 basis points to CPI inflation at the end of 2013 with pork's weight in the CPI basket at 3 percent," analysts at BofAML said in the note.

The Chinese consume more than half the pork produced in the world, according to data from Northstar Commodity Investment, and the appetite has grown as consumers gain more disposable income and spend it on meat products that were once out of reach.

(Read more: Hog stock: Inside China's strategic pork reserve)

Still, BofAML analysts said they do not expect pork prices to spike as much as they did in 2007-08 and 2010-11, when they surged by 75 percent and 80 percent, respectively, given higher levels of supply.

"Although current live pig stock is lower than that in 2012, resulting in a rising pork inflation, it is much higher than that in 2011 (and likely in 2007, but no data is available)," they added.

— By CNBC.Com's Dhara Ranasinghe; follow her on Twitter @DharaCNBC

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