Tea that has gone off the boil no longer burns the lips. One benefit of the economic slowdown in China is that inflation fell to a 20-month low in February. The question is whether weaker consumer prices will lead to some easing of fiscal policy. That would be positive for Chinese equities. Relatively cheaper inputs should boost margins.
Lower inflation may well help some companies to manage costs, but not in the way investors are used to in the west. Take consumer staples. As part of Beijing’s efforts to stop inflation running out of control last year, it pressurised staple brands to go easy on raising prices. Unileverbacked down last year after the economic planning agency fined it Rmb2m for merely discussing price rises with the media. Such talk leads to consumers stocking up before prices rise: a clever tactic. But pseudo price controls kill margins when input costs are soaring. Tingyi, which may be the world’s biggest maker of instant noodles – an important staple in China – saw its gross margins over the past nine months fall by a sixth from a year earlier. But with food inflation moderating from about 12 per cent last year to 6.5 per cent in February, Tingyi’s margins should improve again. When consumer prices last hit a trough in the second quarter of 2009 (they actually fell 1 per cent following runaway inflation in 2008) Tingyi’s gross margins expanded 11 per cent year on year that quarter.