China might curb a financial crisis, supporting dry bulk shippers

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Will China's financial crisis crash the dry bulk shipping party? (Part 6 of 7)

(Continued from Part 5)

Inflation rate

Undoubtedly, collapses in China’s economic growth, the Guggenheim Shipping ETF (SEA), and dry bulk shipping companies have occurred during periods of high inflation rates.

The central bank’s role

In countries like China, the central bank worries about inflation. While rising inflation could reflect improving economic conditions, high inflation (driven by easy credit and speculative activities) leads to bubbles and bursts, which tend to result in catastrophic cleanup costs for the government. As a result, the central bank tries to keep price inflation in moderation.

When inflation starts to hit the government’s target level, the central bank will start to tighten monetary policy. The period of commodity price inflation we saw between 2009 and 2011 is a consequence of easy credit and speculative activities that took off in 2009.

Consumer inflation falls

In December 2013, China’s inflation based on a basket of goods purchased by consumers rose 2.5%, which was lower than October’s 3.0%. These were primarily driven by lower food inflation. The overall drop in inflation eases analysts’ concerns that the central bank may have limited tools to ease monetary policy when it needs to, or even tighten monetary policy and lead to lower economic growth, which would be positive.

Producer inflation treks along

Prices of goods sold at the producer level remain in deflation, falling 1.4% year-over-year in December 2013. This is an improvement since mid-2012, which suggests that manufacturing activity is picking up and downward profit pressure is easing—which is positive for dry bulk shippers. Yet weak producer price growth suggests China’s manufacturing sector continues to experience an overhang from a surge in capacity, driven by large credit in 2012.

Whether this excess capacity results in multiple defaults in loans, as the central bank keeps tight money supply growth, or whether China will keep supporting growth and engineer a “soft-landing” will have different implications for dry bulk shippers and the Guggenheim Shipping ETF (SEA). The first case would have large negative implications for dry bulk shippers and emerging markets, while the latter case supports more of a long-term recovery.

Continue to Part 7

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