uploads///Inflation in China is dipping

Lower Inflation In China Could Be Good For Its Economy

By

Updated

The good news for the global recovery is that I believe China will most likely achieve a soft landing in the near term. China grew at 7.4% in 2014, slightly lower than the Government’s estimate of 7.5%. However, it still is of the world’s fastest growing economies. And as inflation in China continues to slow, looser monetary policy from the country’s central bank should further support the local economy.

As such, I continue to hold a neutral view of Chinese equities, which I prefer to access through the iShares MSCI China Index Fund (MCHI), the iShares FTSE China 25 Index Fund (FXI) and the iShares MSCI China Small Cap Index Fund (ECNS).

Inflation is dipping in China

Article continues below advertisement

Market Realist – Lower inflation in China could be good news for its consumers.

The graph above shows the year-over-year inflation in China, based on the CPI (consumer price index) for 2014.

Inflation slipped from 2.5% in January to 1.5% in December. In fact, inflation was up at around 6.5% in 2011, when the Chinese economy was growing at over 9%.

A dip in inflation is usually a good thing for emerging markets (EEM) (VWO). Having said that, the dip in China’s inflation rate could be partly attributed to a cooling off in its GDP (gross domestic product) growth rates, which would be bad news.

The recent dip, though, can also be attributed to the slump in crude oil (USO) prices. This could be good news for China (FXI) (MCHI), as the decline in oil prices is akin to a tax break for an economy that consumes as much oil as China does. Some of the savings from this could lead to higher consumption, which would support growth. All economies that are net importers of oil should see a similar benefit.

For more on China and other emerging market, read Accessing The Emerging Market Consumer? Think Small.

Advertisement

More From Market Realist