Inflation, Employment and Monetary Policy in China

 |  Includes: EWH, FXI, HAO, TAO, YAO
by: Zhong Jin

The economic buzz word of this week is inflation. China, the UK, the US, and Canada all will release their January CPI numbers this week.

As widely reported, the severe drought in northern China helped push the food cost in China up by 10.3% in January; inflation in China is up to 4.9%, from 4.6% in December. The weights of components of Chinese CPI are changed in January: the weight of housing increased while the weight of everything else decreased modestly, including food. This change should have limited impacts on CPI since prices of both housing and food costs are rising in China. Even though the latest January narrowing trade surplus has boosted the Chinese stock markets as investors saw a sign of more balanced economy and less money inflow into China’s economy, the threat of spiking food inflation after the Lunar New Year holidays weighed heavily on the stock market.

Economic data of the first two months from China are traditionally not very informative due to the seasonal effect from the Lunar New Year holidays. Economic activities usually return to normalcy in March. Right now, millions of inland migrant workers are traveling back to the coastal areas to find jobs. Media reports showed that a labor shortage that has been confounding manufacturers in China's coastal regions is spreading to the underdeveloped inland, which should not surprise anyone since similar reports surfaced around this time every year in the past few years.

But what makes 2011 different is the ample anecdotal evidence that the job market for college graduates in China is reviving. Thought there are no reliable statistics available on the ratio of employment of recent college graduates now, reports of an increasing number of campus interviews and abundant options available for regular college graduates suggest that unemployment, and especially youth unemployment, is declining.

At the same time, wages are also on the rise in China, both for migrant workers and college graduates, in an effort to catch up with the inflation. Unemployment and inflation are always the biggest threats for the Chinese economy. If the improving employment situation is confirmed, policy makers in China can be more aggressive when it comes to fight inflation. Further interest rate and reserve rate raises are expected to occur in the next two months. USD/CNY is also expected to drop as it could help dampen the import prices of soybean, wheat, and other agricultural products which are essential for food inflation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.