SHANGHAI: It is hardly apparent in the official data, but inflation is becoming another headache for investors in China.
For most of this year, Chinese stocks have fallen and prices of government bonds have rallied—a typical response to the prospect of slower growth, which would tend to depress earnings and reduce upward pressure on prices.
But in the past two months, both share and bond prices have fallen. Benchmark Chinese government 10-year bond yields, which move inversely to prices, rose 0.24 percentage point from a mid-July low to 3.70% as of Friday.
To some economists and asset managers, this reflects growing unease about inflation.
The official consumer-price index showed a 2.3% year-over-year increase last month, up from 2.1% in July. While only a small rise, some investors are concerned that price data, previously seen as more reliable than official growth figures, are also becoming less reflective of reality.
“There’s no confidence in the stock market because there’s no confidence in the economy, and I am not touching bonds because inflation is going up,” said Honglin Gu, a 47-year-old retail investor from eastern Jiangsu province.
After staying away from capital markets for a year, Mr. Gu said he is wavering between investing in low-yielding but safe money-market funds and betting on China’s still resilient property market.
“Maybe I’ll go for an apartment again,” Mr. Gu said. “When money is worth less and less and financial markets are hopeless, real estate never disappoints, at least in China.”
Part of the worry over inflation is due to what are viewed as one-time shocks, including an outbreak of African swine fever, causing a shortage of pork, and floods in a major vegetable-growing region.
But there are potentially stickier problems, too. While state figures show rental costs rose only 2.6% in the 12 months to August, media reports say prices are rising 10% to 30% in big Chinese cities. Relatively few Chinese people rent their accommodation, but this is growing in importance as the rental market increases.
Li Qilin, chief macroeconomics analyst at Lianxun Securities, said reported CPI “isn’t consistent with what the public feels,” adding that some of the National Statistics Bureau’s methods were outdated. The bureau didn’t respond to requests for comment.
“In China, the political sensitivity of economic data tends to be more pronounced,” said Rodney Jones, Beijing-based principal of Wigram Capital Advisors, an economic research firm. “The government manages data to serve the needs of its economic narrative,”
An alternative index used by Wigram suggests annual inflation hit 3.7% last month. This index has outpaced the official one since March.
Beijing wants show it is battling excess debt, but that the economy is still growing quickly and prices are stable, Mr. Jones said. “Our version of the story is that they are deleveraging, but we see evidence of higher inflation and lower growth.”
As for GDP, China says it grew 6.7% year-over-year in the second quarter. Capital Economics, a research firm, puts it at a monthly average of 5.7% during the quarter, adding that it slowed to 5.1% in July.
The strength of industrial activity in the world’s second-largest economy, a major component of GDP, stands out. The statistics bureau says value-added industrial output rose by 6.1% in August from a year earlier, up from 6.0% in July.
“This data has been very stable in recent years, which is highly implausible because China has gone through different economic cycles,” said Julian Evans-Pritchard, an economist at Capital Economics. He added that his firm’s own index, based on the same raw data, shows industrial output grew 2.9% last month.
China is still a long way from the predicament the U.S. found itself in in 1980, in a famous “stagflationary” episode when inflation hit 15% even as the economy contracted. What is more, today’s bond yields remain comparatively low and the scale of the recent selloff is modest—in 2013, for example, yields soared from under 3.3% in early May to more than 4.6% by year-end.
Nonetheless, it makes Beijing’s balancing act, of controlling financial risk while stimulating economic recovery, even harder. “There isn’t much space for policy maneuvering,” said Mr. Li at Lianxun Securities. “If you ease monetary policy too much to support the economy, inflation will worsen. If you tighten policy, the economy will suffer.” - WSJ
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