China is due to release its consumer price inflation data for May. As per median forecast available from Bloomberg News Survey, CPI in the country is expected around 5.5% compared to 5.3% in April. Consumer inflation hit a 32-month high of 5.4% in March. To curb the rising rate of inflation, the PBoC hiked its benchmark interest rates 4 times since October 2010 and raised the required reserve ratio for commercial banks 5 times this year to a record high of 21 %. The government’s target for full year is 4% inflation.
Why Chinese CPI is important?
China, India and emerging Asia has been leading contributor in global recovery after a major recession started from late 2007. Chinese economy is the second largest in the world to replace Japan recently. Chinese economy has been growing at a pace of 9%-11% while the US and EU are growing a pace of 1.8% and 2.5% respectively. Japan is now in a recession with GDP falling 3.5% during 1st quarter. Both and US are not likely to cross the 2% mark as indicated by recent data releases.
Now, a rise in inflation is a risk (short term problem) may impact the long term objective of the policy markers. Chinese property bubble is a growing threat for the domestic economy and the same way for the global economy. If inflation level persists then we may see further tightening policy by the PBoC (People bank of China) which may slow down economic activity. The Chinese tightening may impact financial market to a considerable extent leading decline in industrials and energies, deep correction in global stocks.
As per World Bank, inflation control should still be the government top priority.
This lead a bearish mindset for markets
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