PBOC To Defer To Fed On Easing After Inflation Comes In Hotter Than Expected

Last week, when we commented on the amusing spread between the Chinese PMI as measured by HSBC on one hand (plunging) and the official number (soaring), we had one very simple explanation for this divergence: "the Schrödinger paradox - where the economy was doing better and worse at the same time - which was experienced for the past three months in the US (and is now finished with the economy rolling over), has shifted to Shanghai, where it is now the PBOC's turn to baffle all with bullshit. Why? One simple reason: despite what everyone believes, China still has residual and quite strong pockets of inflation. So while the world may be expecting an RRR, or even interest rate, cut any second now (just as China surprised everyone literally house before the November the global FX swap line expansion by the Fed in November 2011), the PBOC is just not sure it can afford the spike in inflation, or even perception thereof." It appears we were correct, following the just released Chinese CPI number, which in March printed at a far greater than expected 3.6%, on expectations of a 3.4% print, and well above the February 3.2%.

The core number so most relevant to social stability - food inflation, came at 7.5%, the highest since January's 10.5%. Bloomberg, as well as the PBOC of course, validates our prediction that inflation is still a significant factor in the Chinese economy: "Today’s data show Premier Wen Jiabao’s officials may need to remain alert to the risk of inflation bouncing back even after price increases stayed below the government’s 4 percent target for a second month. Authorities will seek to “prevent a rebound” in consumer prices and manage inflationary expectations, Wen said during a visit to southern China from April 1 to 3." Translation: the Shanghai Composite will be rather unhappy as the possibility for any RRR cut is now pushed back by at least another month into the future, as the Chinese central bank has decided to defer to Bernanke's (and the BOJ's) upcoming QEasing, thank you very much.

China CPI:

From Bloomberg:

“Inflation will pick up further as China’s economy warms up again,” Liu Li-Gang, Hong Kong-based head of Greater China Economics at Australia & New Zealand Banking Group Ltd., said before the release. Rising wage costs and the government’s policies to boost consumption will add upward pressure on prices, he said.


Wen said last month the government aims to keep consumer- price gains within about 4 percent for 2012, taking into account risks from imported inflation and rising costs of land, labor and capital. He also pledged to change the way the price of resources including electricity and fuel are set to better reflect their costs.


China, the world’s largest oil consumer after the U.S., increased gasoline and diesel prices for the second time in less than six weeks on March 20 after crude had its biggest monthly gain in a year, adding to pressure for consumer prices to rise.


China Petroleum & Chemical Corp., Asia’s biggest refiner, said last month it will ramp up crude production and develop natural gas fields to counter losses from selling diesel and gasoline at state-mandated prices. Sinopec, as the Beijing-based company is known, said fourth-quarter profit dropped 23 percent, missing estimates.

And Reuters:

China's annual inflation spiked unexpectedly in March to 3.6 percent driven by rising food prices, data showed on Monday, surprising investors who had bet on cooling price pressures to give Beijing room to ease monetary policy.

There is data, and then there is data... the type that is telegraphed by central authorities for market consumption purposes:

Underlining slowing food inflation, official data showed pork prices fell every week in March and have shed 10 percent in the past two months. Pork is a staple meat in Chinese diets and a key component of food inflation.


And though China raised retail gasoline and diesel prices in March by 6-7 percent, analysts say that has limited direct impact on overall inflation as they believe energy carries a small weight in China's consumer price index basket

Our view: render unto Bernanke all hopes of easing in the next three months: a badly burned by prior QEs China is going to wait this round out. Why? Because the last thing China needs is to go ahead and cut rates only for Bernanke to follow through and slam the country with America's favorite export: monetary inflation, leading to such festive occasions as [insert geographic location] [insert season] around the world.


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