China Inflation Data Show 'Recovery Not Secured'

Tomohiro Ohsumi | Bloomberg | Getty Images

Easing inflation in China, which slowed at a faster-than-expected rate in March, is raising doubts over the health of the recovery in the world's second largest economy.

"The economic rebound China has experienced over the last few months should have brought about greater inflationary pressure. But, both CPI [consumer price index] and PPI [produce price index] readings for March point to subdued inflation. Indeed, that is another indicator that the recovery is not yet completely secured," wrote Alistair Thornton, senior China economist at IHS, which provides economic and financial analysis.

"We have yet to see a surge in final demand ripple throughout the economy. The recovery - springing originally from the mini-stimulus of mid-2012 - has been largely government-driven, and has been underpinned by property froth and rampant shadow finance," Thornton added.

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The country's consumer price index rose 2.1 percent in March, compared with 3.2 percent in the previous month. While consumer prices typically ease in the month following the Lunar New Year - a two-week holiday period that fell in February this year - CPI came in below expectations for a rise of 2.4 percent.

The producer price index (PPI), meantime, fell by a more-than-expected 1.9 percent in March, from a 1.6 percent drop in the previous month.

The easing consumer goods inflation is attributable to slowing demand as well as Beijing's crackdown on conspicuous consumption, according to Ting Lu, China economist at Bank of America Merrill Lynch, noting that "prices of luxury items like wine, tea and fish have declined a lot."

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He added that deflation in the factory sector is a result of both lower raw material prices and a slowdown in inventory demand, and a recovery in inventory uptake could emerge if home sales remain strong and worries over property tightening measures announced in February alleviate.

Policy Tightening Unlikely

According to Lu, forecasts for monetary policy tightening in the mainland - via reserve requirement ratio (RRR) and interest rate hikes - are premature.

While inflation may creep up in the second half of the year due to a low base effect, the People's Bank of China is unlikely to raise the RRR or interest rates this year, he said.

"I expect the central bank will stick to its current neutral stance. The market has been irrationally making rising inflation a concern because of the jump [in CPI] between January and February, we don't think it's a big concern," Lu said. The CPI index rose to 3.2 percent in February, from 2 percent in January.

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Li Huiyong, economist at financial services company Shenyin & Wanguo agrees inflation will not be a large concern for Chinese policymakers this year.

"Inflation would not be a big concern for policymakers this year given a mild recovery in domestic economy. The PPI data also reflect the still weak nature of the economic recovery," Li told Reuters.