A surge in Chinese prices that has rattled financial markets may be poised to ease as weather improves and the economy returns to more normal growth following a period of extra stimulus following the global financial crisis, a top China economic specialist said.
In a report that rattled financial markets globally, China said last month that its consumer prices index rose by 4.4% in October from a year earlier, the biggest increase in 25 months and well above its 3% annual target for 2010. However, vegetable and fruit prices accounted for 27% of the October rise, and stripping that influence out, the CPI increase would have been only 3.5%, close to a pre-financial-crisis average of 3.6%, said Andy Rothman, the China macro strategist at brokerage CLSA.
Food prices rose largely because of bad weather that hurt supplies, rather than a huge, sustainable increase in demand, Rothman said at a speech at the Shanghai Foreign Correspondents Club on Friday. Illustrating that the government believes that inflation is in check: the Shanghai government increased water prices by 20% in November, Rothman said.
Overall, China’s CPI will likely increase by 4-4.5% next year, Rothman said.
China’s stock prices have fallen of late amid worries about the impact of monetary policy tightening. Big global financial institutions such as Morgan Stanley and HSBC, along with manufacturers such as GE, GM and Ford, have been looking to benefit from the country’s growth.
To help keep inflationary expectations in check and reduce speculation, Chinese authorities will likely raise interest rates by three times by next summer, Rothman predicted. Those increases, however, aren’t like to derail brisk Chinese economic growth, Rothman said. He expects China’s GDP will increase by 8-9% next year compared with 10% this year. Rothman also predicted that China’s currency will increase by about 7% in value against the U.S. dollar in the coming year.