Reams of new data from China show that its economy has begun to slow. Inflation for April was 5.3%–modest by Chinese standards. Information on industrial output and loans also indicated that China’s inflation will not move to double digits and that its manufacturing sector will not overheat. The news is moderately good. The People’s Republic’s voracious appetite for crude and agricultural goods may slow–another way that inflation may be lessened.
The data from China also indicates that the impact of double-digit wage increases has been less than expected. Perhaps the jump in salaries has been lower than reported. Perhaps companies have begun to accept lower margins.
The net effect of slower inflation and factory output may actually help China’s export economy. There have been fears that the cost of Chinese finished goods would rise so high that its trade partners such as the US would import less to cushion the blow of soaring prices. Alternatively, high Chinese prices might slow consumer spending in the US or cause an increase in the prices of consumer goods which would worsen U.S. inflation. China’s moderating GDP increases should allow it to maintain a balance among profit in its manufacturing sector, inflation, and the need for its companies to raise the cost of their exports.
The initial reaction to the news about China’s modest inflation and manufacturing activity may seem bad for the country’s growth prospects. On the other hand, it may make Chinese goods more appealing for countries that import them.
Douglas A. McIntyre
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