A regular reading of activity levels by purchasing managers within the service
sector, published by HSBC/Markit on Monday, recorded a series-record low of
50.6 for the month of August.
That signals no more than a marginal expansion. Six of the 13 official PMI
series tracked by China’s Federation of Logistics and Purchasing have dipped
below 50, indicating contraction. Even in a world preoccupied by Europe,
this should raise concern.
China’s policymakers are in a bind. Note that August was the first month this
year that was free of increases in either the reserve requirement ratio or
interest rates. As the US and Europe once more struggle for economic
traction, some factions within the politburo would like to join them in an
extended monetary tightening pause, or even to ease a little. But headline
consumer price inflation, politically sensitive in China, will not allow it.
July’s CPI was almost unchanged at a three-year high of 6.5 per cent. Media
reports suggest not much change in August’s reading, to be reported this
Friday.
The good news is that base effects, if nothing else, will help to tame CPI in
the coming months. A rising currency, too, works to take the edge off import
prices: August’s 10 per cent annualised rate of gain against the dollar was
the biggest since last September. But the tensions are obvious. Writing last
week in the policy periodical of the Chinese Communist party, Premier Wen
Jiabao reaffirmed that price stability was the “primary task”, while
claiming that signs of slower growth were “at a reasonable level”. Maybe
they are. But balancing between jobs and prices has rarely seemed so complex.
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