China is producing more goods than anyone expected, and its people are paying higher prices at home than predicted, according to a report on MarketWatch. As with everything China-related, the world has immediately scrambled to figure out what this two-tenths of a percentage difference between predictions and expectations could possibly mean.
So far, not much. The specific numbers are that Chinese GDP was up 9.7 percent over the same month last year, while its Consumer Price Index (CPI) was up 5.4 percent over the same month. Analysts — that amorphous cloud of gamblers always quoted in these stories; people who seem to exist to make these sorts of errors so they can explain them away — apparently expected 9.5 percent for the GDP number and 5.2 percent for the CPI. They were 0.2 percentage point short on each.
The question for electronics manufacturers is whether the GDP number, which brings good news of a galloping Chinese economy, outweighs the worry embedded in the CPI number. The CPI number is scary to markets because it suggests Chinese prices are rising fast enough to create inflation.
As MarketWatch noted somewhat shrilly, the real issue is whether the Chinese central bank, fearing inflation, is going to raise interest rates at least once more this spring, which would be a fifth hike since last fall, and maybe again in the summer. If China raises interest rates, one effect will be to suppress demand by Chinese industry and consumers, cutting into sales and supply of raw materials like rubber, supply contracts with trading partners like Australia, and contracts for oil.
On the other hand, we've heard this all before. A decade or so into China's boom, the annual “Is China overheating?” stories have become a predictable part of the yearly news cycle, and they read nearly identically around this time each spring. Last year, Time Magazine asked if 11.9 percent economic growth rate for China in 2010 was too much (no, apparently, as this year China did even better and hasn't crashed yet). Businessweek had asked the same question four years earlier, in 2006. Still no crash.
It's conceivable, of course, that the answer then, and now, was always “yes,” and that China has been consistently overheating. And that the Chinese government has gotten good at managing that. And that electronics producers, rather than panic, can play ball with Beijing each year, and manage what seems like a steady boom.
For electronics manufacturers, price rises within China could affect not just labor costs, which have risen sharply enough to cause some manufacturers to move elsewhere in Asia, but also the cost of electricity, transportation, fuel, and the like. So far, that hasn't caused any apparent reaction among investors in companies doing business in China.
Stock markets across the region fell on the news of the CPI report. But not much — and so far, it looks like the risk of inflation spooks everyone way more than the risk of higher interest rates.
So far, it looks like the time to panic will be when your iPad 2 doubles in price. We’ll let you know.