China: Slowing Growth, Lower Inflation, No More Rate Hikes?

First things first, let’s get down and dirty with the numbers, shall we?

Chinese officials must’ve breathed a sigh of relief when they saw that the CPI for April only rose by 5.3% from a year before, slightly lower than the 5.4% uptick in March.

China also reported that exports outpaced imports by 11.4 billion USD in April. Analysts were expecting the trade balance report to show a 3.3 billion USD surplus to follow the positive 100 million USD reading we saw for March.

Lastly, it was reported that on an annual basis, fixed-asset investment in the country is up from 25.0% in March to 25.4% in April.

But wait! Before you start chugging Tsingtao to celebrate these healthy figures, you should know that this week’s roster of economic data wasn’t all good in the hood.

For instance, year-on-year retail sales and industrial production fell short of expectations when the reports came in at 17.1% and 13.4%, respectively. Compared to last year, consumer spending was anticipated to have been at 17.6% in April, while the output of the industrial sector was predicted to have risen by 14.5%.

Not surprisingly, a few jittery naysayers think that this slowdown could be enough reason for the People’s Bank of China (PBOC) to stop hiking rates! In fact, some are betting the farm that the bank could cut interest rates in the second half of the year to help the Chinese economy keep its momentum!

Their worry is that the country’s fixed asset investment could slow in the months ahead. Consequently, lower investment and weak consumer spending could take a toll on economic activity.

However, if I were you, I wouldn’t go to my local bookie and start making bets on Chinese rates cuts without looking at the bigger picture.

While inflation seems to have found top in April, we can probably expect it to remain above the PBOC’s target in the coming months. Yes, food and commodity prices rose at a slower pace in April. However, rising non-food prices is another concern that will continue press inflation.

In addition, even with the PBOC’s repeated interest rate and reserve rate hikes, there is still way too much liquidity in the system that is also contributing to rising prices.

Earlier this week, Vice Premier Wang Qishan said that inflation was China’s “most pressing problem” and that monetary policy would focus on toning it down.

Good luck to them! For the most part, number crunching quants expect inflation to hover above 5% before finally dying down to 4% by the end of the year. In this old man’s opinion, chances are that we’ll see at least one more rate hike and as many as three before the clock ticks 2012.

Looking ahead, it’ll be interesting to see how the markets react to possible repeated rate hikes by the PBOC.

After all, we saw a major sell-off in higher yielding assets on Wednesday after some data hinted at a possible slowdown in the Chinese economy. Clearly, risk appetite is tied closely to Chinese growth. It was (and is) Chinese demand that is propping up commodity prices.

With gold and oil racing up the charts, both the AUD and the CAD have staked their claim atop the currency leaderboards. Both comdolls are trading way above parity to the U.S. dollar.

However, if the PBoC were to raise rates, it could dampen Chinese growth as demand wanes down. Commodities could take a hit and take with them the Australian and Canadian dollars.

That’s just my two cents. What do you think? Are we going to see more rate hikes from China? Or did we already see the end of it? Vote in our poll below and hit me up on Twitter or Facebook!