International investors are increasingly focused on domestic demand in the world’s second-largest economy as their key measure of global economic health.
And there are few better ways to gauge that demand than by tracking staple food prices that directly hit discretionary consumer spending — a sector of economic activity that typically generates 40 percent of China’s annual GDP growth.
Lower or even just slower food price rises are a gift to consumers, says Carl Weinberg, chief economist at High Frequency Economics in New York .
“I don’t think China has anything like the recession risk that people seem concerned about and I don’t think they need any stimulus,” Weinberg told Reuters.
Weinberg’s calculations suggest that Chinese consumers enjoyed at least a 1.8 percent increase in real disposable income between July and November as consumer price inflation eased from a three-year high, with a boost to discretionary spending of 0.9 percent.
The implication is that China’s factories will ramp up output to meet rising discretionary spending power, making slower increases in food prices the most important factor boosting GDP growth and aggregate demand.
“The slowdown of food prices is a massive economic stimulant,” Weinberg says. “(It) will generate more economic stimulus than any government programme of monetary policy change ever could.”
Inflation is a major preoccupation for China’s ruling Communist Party, as rising prices have often been accompanied by periods of protest and social upheaval.
Spikes in pork prices have constantly driven up Chinese inflation. Though pork only accounts for 3 percent of China’s consumer price index, it is the most popular meat in the country and its price has a big impact on the public’s inflationary expectations.
Until a few weeks ago, the government’s economic policies were calibrated to contain the inflationary aftereffects of the 4 trillion yuan ($635 billion) package unveiled in 2008 as the global financial crisis tore through market and consumer confidence worldwide.
Inflation running at an average annual rate around 150 basis points above the official 4 percent target in 2011 is one key reason why Beijing is reluctant now to offer anything other than policy “fine-tuning” to combat slowing GDP growth.
Economists expect China’s annual growth rate to have eased for a fourth successive quarter in the last three months of 2011, perhaps even coming in below 9 percent.
It makes the domestic demand story all the more vital.
The point was underlined by China’s Ministry of Commerce on Thursday, when it revealed that the country’s trade surplus had shrunk to just 2 percent of GDP in 2011. It was more than four times that size just five years ago. source: www.reuters.com/article/