China: Higher CPI will not tighten policy

March CPI inflation surged by 2.3% YoY due to higher pork prices. On production front, the rebound in PPI (Mar: 0.4%; Feb: 0.1%) is unlikely sustainable due to sluggish global demand.
Nathan Chow12 Apr 2019
Photo credit: AFP Photo

China: Higher CPI will not tighten policy

Consumer price inflation accelerated to 2.3% YoY in March from 1.5% in February. Food inflation jumped most in 13 months to 4.1%. Pork prices, which fell by -4.8% in February, surged by 5.1% in March. The swine fever outbreak culled live hog and breeding stock. Live pig stocks fell 23% YoY in February in the Shandong province, one of the country’s largest pig farming hubs. The decline in sales of pig feed since October will continue. Pork prices are likely to stay elevated.

In contrast, non-food inflation inched up to 1.8% YoY in March from 1.7% in February. Notably, the -1.2% decline in prices of traffic and communication appliances reversed into a 0.1% increase on higher energy prices. But this was offset by a modest fall in inflation to 2.1% from 2.2% in housing, and to 2.7% from 2.8% in medicines, medical care and personal articles. Core inflation (excluding energy and food prices) has remained stable around 1.8% in the past seven months. Consumer sentiment has been dampened by weaker expectation of future income growth. According to the PBoC’s Urban Depositor Survey, the proportion of respondents who intended to “save more” has, over a quarter, increased by 0.9% to 45% in 1Q19. This mirrored the recent drop in discretionary spending. Inflation expectation was the third lowest since 2010; only 26.8% of the respondents expected prices to surge. As such, we maintain our inflation forecast of 2.3% for 2019 (2018: 2.1%).

Producer price inflation rose to 0.4% YoY in March from 0.1% in February, driven by the mining industry. In month-on-month terms, PPI increased (0.1%) for the first time in five months. The improvement in manufacturers’ pricing power, if sustained, could ease pressure on profit margins. This would provide relief to industrial enterprises where earnings have been depressed by sluggish producer inflation, from oil refineries to steel mills. Profit growth of industrial firms has fallen to 14% YoY in January-February, the weakest since 2011.

Yet the risk of factory deflation still looms due to benign commodity prices. The price of domestic hot rolled steel is trading 9% below its August 2018 peak. Copper prices remained under pressure with a 3% YoY decline. Sliding factory prices over the past year have eroded corporate profits and weakened the debt repayment ability of indebted companies. By our estimation, the real interest rates shot up to 4.2% in 1Q18 from the trough of 3.1% in 1Q17. Policymakers have ramped up infrastructure investments alongside tax cuts to support demand. Even so, increased global uncertainty may create headwinds for commodity prices. The IMF has downgraded its global growth forecast for 2019 from 3.5% to 3.3%, the slowest expansion since 2016.

All told, March inflation numbers will not constrain the PBoC’s monetary policy maneuvering this year.

To read the full report, click here to Download the PDF.

Nathan Chow

Strategist - China & Hong Kong

The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or finan­cial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.

DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.

PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No.