Will China's Bird Flu Put Inflation Hawks at Bay?

Shanghai commuters wear face masks as the latest H7N9 bird flu virus continues to claim victims.
Mark Ralston | AFP | Getty Images
Shanghai commuters wear face masks as the latest H7N9 bird flu virus continues to claim victims.

An outbreak of bird flu in China and recent images of dead pigs floating in rivers have hit demand for chicken and pork, two major food sources, and that's likely to curb inflation in the months ahead, analysts say.

Food prices make up 30 percent of China's Consumer Price Index, with pork and chicken accounting for a sizable chunk of that. So any dramatic swings in their prices could alter China's inflation rate.

Inflation in China slowed to 2.1 percent in March from a year earlier, down from a 10-month high of 3.2 percent in February, easing concerns that China's central bank could move to tighten monetary policy this year to keep inflation at bay.

(Read More: China March CPI Up 2.1%, PPI Falls 1.9%)

"Demand for chicken in mainland China has been hit by the avian flu scare and this will likely act as an additional dampening factor on Chinese food-price inflation in coming months," said Rajiv Biswas, chief economist of Asia Pacific at IHS Global Insight.

The H7N9 bird flu virus has so far affected over 100 people and killed 21, while the perception of pork has been damaged by reports last month of 16,000 diseased pig carcasses washing up in inner-city rivers.

"The widely reported images of dead pigs floating in rivers have also contributed to concerns among the Chinese public about pork consumption, contributing further to the decline in pork prices. Given the importance of pork in the Chinese food CPI, this is helping to dampen inflationary pressures," added Biswas.

Short-Term Impact

There is some evidence that meat prices in China are falling. Pork prices, a staple meat in China, have fallen 16.2 percent since late January, Reuters reported last month.

"The bird flu incident will bring down the short-term inflation rate," said Jackson Wong, vice president of equity sales for Hong Kong-based trading firm Tanrich Securities. "Pork and other food items especially, accounted for most of the rise in inflation in February. The reduced demand in these items will definitely lower their prices in short term."

But he added that the impact on inflation was unlikely to last too long.

"If the bird flu escalates like the SARS in 2003, the impact still shouldn't affect the overall inflation any longer than 3-6 months, depending on the seriousness, then again you would expect more (economic) stimulus to follow," Wong said.

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The outbreak of SARS, a viral respiratory disease spread between humans, in South China and Hong Kong between the end of 2002 and the summer of 2003, affected around 8,000 and led to more than 700 deaths, according to the World Health Organization.

(Read More: Could China's Bird Flu Be the Next SARS?)

Analysts added that any escalation in the bird-flu outbreak could also weigh on China's economic growth.

China's annual rate of growth slowed to 7.7 percent in the first quarter of 2013 from 7.9 percent in the fourth quarter of 2012, prompting concerns about the outlook for the world's second biggest economy.

A survey on Tuesday from HSBC meanwhile showed growth in China's manufacturing sector dipped in April as new export orders shrank.

"Clearly if it (bird flu) becomes an epidemic, then this will have a significant negative impact on consumer spending, not only for meat and poultry, but also on many other forms of consumer expenditure, such as restaurants and entertainment. This could become a drag on growth as well as dampening inflation," said Biswas at IHS.

(Read More: Has China's Economy Hit a 'Dead End'?)