Understanding how policy makers make decisions is important to investing, as they have the tools to rein in an overheating economy or to prevent further slowdowns. Monetary policies such as changing the interest rate and capital reserve requirements are tools that central banks can use to accomplish such tasks. In setting those rates, policy makers often look at the inflation rate. If the inflation rate is not too high, it provides room for the central bank to loosen monetary policies.
Inflation in China is still low
On December 2012, China’s inflation rate rose to 2.5% from 2%. Investors often read articles which say inflation is bad, but a low rate is positive for the economy, since it often suggests that prices are rising because of higher demand. Higher demand is often a proxy for higher GDP levels. Since 2004, China’s consumer price index (CPI), a measure of inflation for consumption goods, increased an average of ~3% year-over-year. For 2013, the government has set the target at 3.5%.
There is room to loosen monetary policies
Although the recent rise in the inflation rate was mainly caused by rising food prices due to the cold weather that reduced supply from northern China, the country has room to cut interest rates or loosen capital reserve requirements if economic activity slows again. Looser monetary policies will increase the supply of debt, which borrowers will use to purchase goods either for consumption or investment, with either option increasing demand for raw materials.
Low inflation rate supports shipping
China’s low inflation rate is positive for shipping firms such as Teekay Corp. (TK), DryShips, Inc. (DRYS), Diana Shipping, Inc. (DSX) and Ship Finance International, Ltd (SFL) as China is now the largest trading nation based on total export and import values. It will surely benefit the Guggenheim Shipping ETF (SEA), which holds positions in leading shipping firms and generally follows the performance of the Dow Jones Global Shipping Index.