MARKET WATCH

MARKET WATCH

OPINION

Behind Slumping PPI

China’s consumer price index (CPI), a barometer of inflation, grew 4.5 percent year on year in January, up from 4.1 percent in December 2011, according to data from the National Bureau of Statistics. The rebound was attributable to the impact of the Spring Festival holiday, which fell on January 22-28 this year. Expectations abounded that the CPI growth would drop.

In striking contrast, growth of the producer price index (PPI), an effective gauge of in fl ation at the wholesale level, drastically fell to 0.7 percent in January, after peaking at 7.5 percent in July 2011. The plunging PPI growth sends out a strong signal that the Chinese economy may be braced for a deeper slowdown.

In economics, CPI is closely connected with PPI, and both indexes can indicate a short-term economic outlook. While the PPI re fl ects price changes in production, the CPI is a sensitive indicator of consumer prices. Price fl uctuation should fi rstly occur at the stage of production, and then fi lter through industrial chains to impact prices of consumer products.That is why the PPI is usually considered a pre-indicator of CPI. But sometimes the CPI may not necessarily move in line with the PPI as they have a different basket of surveyed components.

Many researchers believe the economy will face simmering risk if the CPI growth drops while the PPI growth remains high. That is because cost in fl ation in raw materials, energy and labor can force up production cost and squeeze profit margins. Worse still, the slipping CPI growth means enterprises would face shrinking revenues. That situation may deal a heavier blow to the economy than in fl ation.

In my opinion, the economic health may be worse if the PPI growth falls while the CPI growth remains stable, because that situation means the consumer price increase may be caused by insuf fi cient production. The problem de fi es regular measures to curb in fl ation,such as tightening monetary policies, since liquidity shortages would further affect product supplies. As demand remains buoyant,squeezed supplies could drive up continued growth in consumer prices and lead to a serious consequence of stag fl ation, an economic phenomenon characterized by slower growth and rampant in fl ation.

China’s past experiences also show that faster declines in the PPI growth than in the CPI growth do not bode well for the economy. For example, China’s PPI growth slipped to -5.68 percent in November 1998 from 0.47 percent in March 1997 while the CPI growth went down from 4 percent to minus -1.2 percent. Meanwhile, the country’s GDP growth slowed from 10.4 percent in the fi rst quarter of 1997 to 7.2 percent in the second quarter of 1998.

As similar situation happened 10 years later. The CPI growth decreased from 4.9 percent in August 2008 to -1.8 percent in July 2009 while the PPI growth nosedived from 10.6 percent to -8.2 percent. Unsurprisingly,the GDP growth slowed from 11 percent in the second quarter of 2008 to 6.6 percent in the fi rst quarter of 2009.

So we have a reason to believe that the Chinese economy may be heading for a deeper downturn. Worse still, other data have already show weakness of the economy,including newly extended loans, inflows of foreign direct investment and exports. As a result, it is necessary for the country to stay alert against growing downside risks.

THE MARKETS

Payment Industry Blooms

As e-commerce shifts into full swing, China’s third-party payment sector is receiving a heavy boost.

In 2011, the transaction value of the thirdparty payment industry amounted to 1.78 trillion yuan ($282.5 billion), skyrocketing 57.5 percent from a year ago, said a recent report of the Beijing-based consulting firm Analysys International.

The report also expected the transaction value to maintain rapid growth to reach 2.7 trillion yuan ($428.6 billion) in 2012.

“As competition intensifies, companies are increasingly exploring the emerging mobile payment market and enhancing innovation to lure customers,” said Cao Fei, an analyst with the Analysys International.

Alibaba Fares Well

China’s online commerce giant Alibaba reported a net profit of 1.71 billion yuan($271.48 million) in 2011, up 16.6 percent over the previous year. But the firm said its fourth-quarter net profit fell 6 percent from a year earlier, citing the sluggish global economic environment as a major reason.

The Hong Kong-listed company posted annual earnings before interest, tax and amortization of 1.94 billion yuan ($308 million)last year, up 21.9 percent. The growth was based on more than 76.33 million registered users, an increase of 23.5 percent over the previous year.

Looking ahead, Alibaba said it would continue to invest in new businesses and focus on improving standards for trust and safety, following a successful crackdown on fraud across its e-commerce platforms.

It expected a “more balanced, multirevenue stream model” as the strategy shifted away from membership growth and tilted towards improved quality.