China's policymakers decipher Lunar New Year skewed data

Consumer inflation in China rose for the first time since peaking last July, climbing to 4.5 percent in January, up from the 4.1 percent registered in December (see Chart 1). This increase can be largely attributed to rising food prices, as Chinese consumers spend more for Lunar New Year festivities, arguably China's most significant holiday. The biggest contributor by far to the increase was pork, the most heavily-consumed meat in China, prices of which gained 25 percent year on year and propelled overall food inflation to rise by 10.5 percent. The inflation rate increase will likely make China's policymakers more cautious before taking any further measures to ease monetary policy, although the State Council pledged it would offset rising prices by increasing minimum wages by at least 13 percent every year until 2015.

Manufacturing rebound continues

China's manufacturing expanded slightly in January, with the official Purchasing Managers' Index (PMI) rising to 50.5, an increase of 0.2 percentage points over December (see Chart 2). As a level of 50 demarcates expansion from contraction, the latest reading supports the view that the world's second-largest economy will avoid a hard landing. Delving deeper, although the official sub-index for new orders rose in January to a three-month high, the sub-index for new exports orders fell for the fourth straight month, signifying that waning demand from overseas markets, especially in Europe, continued to weigh on manufacturing activity. The government has repeatedly expressed it will continue implementing supportive fiscal and monetary policies to sustain growth in China's manufacturing sector.

Lunar New Year Effect

China's trade surplus expanded sharply in January to $27.3 billion, up from $16.5 billion in December, as imports tumbled. However, economists believe the data was likely distorted by the Lunar New Year holiday, with the effect turning out to be more pronounced on imports. The Lunar New Year in China falls at different times during January or February each year, distorting trade figures. Exports fell 0.5 percent in January year on year to $149.9 billion, compared with December's 13.4 percent rise (see Chart 3). Even though imports were widely expected to fall due to the holiday, they nonetheless fell by a greater-than-expected 15.3 percent year on year to $122.7 billion, compared with an 11.8 percent rise in December. As many domestic producers shut down production during and in the weeks leading up to Chinese New Year, there is little incentive for them to build up inventories of imported materials. Other observers suggest that the sharp drop cannot be entirely explained by the holiday, and believe a period of weak exports growth lies ahead. Next month's trade figures will give a more accurate portrayal of China's economy.