Zacks_Analysts' Blog : The Taming of Inflation in China - Analyst Blog

China’s National Bureau of Statistics recently stated that the country’s inflation rate has fallen from a 3-year high of 6.5% last July to 4.2% year-over-year in November, which represents its slowest rate of growth in over a year. Producer prices inched up just 2.7% year on year, the lowest in nearly 2 years. Food inflation, a politically sensitive topic, moderated on a sequential basis to 8.8% in November from 11.9% in October.

Clearly, the Chinese economy is cooling down as the outlook of its major trading partners remains grim. Curbs on real estate speculation, stringent bank lending and a slowdown in exports have deflated the hyper-growth that China historically enjoyed. The victory over inflation could not have come at a better time as there are clear indications of a slowdown.

The economy grew at only 9.1% year over year during the June to September period, which represents the slowest growth rate in the past couple of years. Then, in November, the Purchasing Managers’ Index (“PMI”, a gauge for manufacturing sentiment) touched 49, its nadir since 2009. In fact, it was the first time in nearly three years that this measure breached the critical 50 level downward. Latest statistics indicate that exports to the EU slipped 9% year over year while U.S.-bound exports dropped 5%, last October.

Just earlier this month, the government provided a clear signal of a shift to a more accommodating monetary policy when it cut the cash reserve ratio to infuse liquidity. We believe that having curbed inflation, the authorities will now be in a position to further ease monetary policy and proactively pursue growth. The challenge before policy-setters is to boost domestic demand and free up credit controls without unleashing inflation again.     

Despite enjoying high growth, China has at times been a difficult proposition for Western business interests. Two U.S. construction or engineering companies who have done booming business in building China are Timken Co. (TKR) and Caterpillar Inc. (CAT). On the retail side, Wal-Mart Stores Inc. (WMT) is a formidable competitor in China where foreign retailers have often complained about the lack of level playing field.