Should we be concerned about the rising inflation in China?
Chinese headline Consumer Price Index (CPI) rose further on soaring pork price. This caused concerns about a monetary tightening, and stock market corrected upon data release. However, there is significant dichotomy between pork price and other inflation indicators, which continue to depict domestic demand weaknesses. The softening credit expansion might also suggest that a monetary tightening is unlikely. Therefore we still expect the People’s Bank of China (PBoC) to retain a moderate easing-bias in order to support the real economy.
According to China’s National Bureau of Statistics, headline CPI inflation rose to its eight-year high of 3.8% year-over-year (yoy) in October, mainly driven by the surging pork price. Given the supply shortfalls caused by African swine fever, pork price rose by 101.3% yoy, and contributed to 2.43 percentage points to the headline inflation reading. There were also signs of spillover from pork to other meat products, such as beef and chicken, and the overall food CPI increased by 15.5% yoy.
On the other hand, core CPI and non-food CPI remained subdued, reflecting cautious consumer sentiment amid the economic slowdown. The non-food inflation declined to 0.9% yoy (September: 1.0% yoy), at its four-year low. Meanwhile, Producer Price Index (PPI) deflation continued for the fourth month since July, with a 1.6% yoy decline recorded in October. This was mainly driven by the 2.6% yoy price decline in upstream raw materials, especially oil, gas, and chemical materials.
The soaring pork price and CPI evoked memories of the situation back in 2010-11, when CPI inflation stayed above 5% yoy for 9 months at the wake of the mega stimulus. However, this time is different when there lacks a large-scale liquidity injection by the central bank. In October, China’s M2 growth came in at 8.4% yoy, merely in line with nominal GDP growth, while new total social financing slipped to RMB 619billion (September: RMB 2.27trillion, Consensus: RMB 950billion). Therefore, it is unlikely that the inflation could spread quickly beyond food prices.
For the above reasons, the PBoC might take the current inflation as a result of external supply shock rather than the outcome of monetary easing. Instead, the PPI deflation and weak credit expansion likely reflect weak business confidence, which hampers the transmission of PBoC’s easing to real economic activities. Following the latest 5bp Medium-term Lending Facility rate cut on November 5th, the PBoC might continue to lower the rate of its policy tools and cut the required reserve ratio. Meanwhile, restrictive policies will be maintained to prevent liquidity flowing into property sector and speculative activities.
EXHIBIT 1: CHINA’S INFLATION INDICATORS
HEADLINE CPI WAS DRIVEN BY PORK INFLATION, WHILE OTHER INFLATION INDICATORS REMAINED SUBDUED
Source: CEIC, Bureau of Statistics of China, J.P. Morgan Asset Management. Data reflect most recently available as of 12/11/19.
Investment implications
Chinese equity and bond markets corrected on November 11 after the release of high inflation figure, since investors are concerned that the PBoC might tighten up its monetary policy stance. However, investor sentiment stabilized on November 12 after the release of weak credit data, as this in turn suggests a lower likelihood of monetary tightening. Investor sentiment can be easily steered by one piece of macro data but we continue to highlight the importance of focusing on macro fundamentals and long-term trend.
Since the PBoC might remain accommodative in its policy, the current valuation of Chinese stocks is still attractive to long-term investors. Sector leaders in consumer goods, technology and healthcare are preferred given their resilient income growth. Inflow of foreign capital will also support the companies or sectors with strong fundamentals.
For more information, please call or email us. You can also contact your J.P. Morgan representative.