China’s CPI likely to stay above 5 percent in Q2

Posted on Apr 21, 2011 in AllEconomic News
China’s Consumer Price Index (CPI) will likely remain at higher than 5 percent in the second quarter and hit the highest point of the year in June, said Wang Tao, chief China economist at UBS Securities.

Instead of easing or tightening regulations, the Chinese government will likely continue with its moderate control measures, Wang predicted.

Wang noted that rising food prices are the main reason behind the spike in China’s inflation, meaning that if food prices drop, the average inflation will drop accordingly. However, food prices will not experience noticeable changes until after the summer harvest. In addition, non-food prices will likely rise, which will raise inflationary pressure.

Wang does not agree that rising labor costs are a major contributor to inflation.

“Although the nominal wages of workers in the manufacturing sector have risen quickly, labor productivity has grown even faster, so unit labor costs have in fact risen relatively slowly,” he explained.

Wang said that due to seasonal factors, the year-to-year growth rate of China’s CPI in April might be lower than that in March and will rise again in May. Wang predicted that China’s annual CPI growth rate will reach nearly 5 percent in 2011, which is higher than the 4 percent target set by the management layer. Therefore, China’s interest rates will continue to rise.

“There will be two more rate hikes in 2011. The first time will be in early June and the second time will be in the third quarter,” Wang said.

However, he also believes this does not mean the central bank is finished raising interest rates in China. China will continue to raise interest rates in 2012 due to the existence of negative interest rates. Meanwhile, the central bank will inevitably raise the deposit reserve ratio several times.

In addition, Wang also predicted that China’s GDP growth is likely to remain at more than 9 percent in 2011, a decline of 1 percent compared with 2010.

“The economic slowdown is mainly due to the slowdown in exports, not domestic demand. Domestic investments are still very strong. However, the manufacturing sector will rise again along with the changes in the investment structure,” Wang said.

via China’s CPI likely to stay above 5 percent in Q2 – People’s Daily Online.