China inflation - chicken feet or Wal-Mart socks?

Contrasting interpretations of data coming out of China today.

Wang Qing at Morgan Stanley notes that "Food Prices in the 1st Week of April Continued to Decline" on a sequential basis. "Meat and vegetable prices experienced the largest drop. Meat prices declined by ...6.5% from the levels of ... the monthly average in March ... while vegetable prices declined by 12.3%." Not much commentary, but obviously positive news, on balance, even though "wholesale price indices ... show that the average prices for agriculture products and vegetables increased by 1.2% and 1.5% compared to the last week of March".

Meanwhile, Credit Suisse's big cheese economist, Dong Tao is reporting today that risk remains to the upside for inflation across the board, with the March Purchasing Manager's Index showing not only strength in the headline and new orders figures (second highest readings since inception 3 years ago) led by infrastructure investments, but also that INPUT PRICES are rising fast... to THE highest level ever. Good sign of a rebounding economy, but part of that is seasonal, part of that is catch-up from the snowstorm. Given inflation risks, he sees rate hikes in 2H08 and 10-12% RMB appreciation vs the USD in 2008.

He writes: "the pressure is all on the inflation front, as input costs continued to surge. While market consensus and the government are focused on food inflation, we see an across-the-board inflation on the horizon. Besides the rising material costs, anecdotally, the wage rate is also rising fast and accelerating, as people’s expectation on inflation has changed. The surge in global food prices does not help the situation. As wage pressure spills over from the manufacturing sector to the services sector, we anticipate a much quicker price hike given that the services sector does have the pricing power and has little room to improve productivity."

On balance, I think the figures are market positive near term. Comments from Wen last week on the importance of economic growth alongside inflation concerns indicates that the govt is aware of the continuing risks to growth, including softer net exports going forward... but food inflation remains the key, and with continued softer data on that front, policy developments may continue to surprise the market on the upside for the time being.