China: CPI Sluggish But Fiscal Policy Rather Rate Cut Next?
Bottom Line: Headline inflation was soft, but core remains at 0.8% Yr/Yr. Even so, inflation is soft enough to argue for further stimulus, given the sub 5% GDP trajectory. Next up is around Yuan1trn of infrastructure investment from the government. However, it is unlikely that the PBOC would now announce a MTF cut at the same time and we think a 10bps cut will now arrive in November.
Figure 1: China Headline and Core CPI (%)
Source: Datastream/Continuum Economics
Fiscal Policy Stimulus
The September headline CPI came in lower than expected at zero Yr/Yr, as food prices dragged on the index – food supplies were plentiful ahead of golden week. The core inflation rate remains a better indicator of inflation and remained at 0.8% Yr/Yr. It is also worth noting that the 0.2% gain mth/mth shows some mild inflation momentum. Given base effects, the Yr/Yr rate will likely drift up into early 2024 and avoid headlines of persistent deflation. Even so, China inflation trajectory is soft due to excess production versus cautious demand from consumer for goods. The inflation trajectory allows for more room for stimulus, given the soft trajectory for the economy.
We had pencilled in a 10bps cut in the MTF rate in October, but we are now pushing that back to November. An MTF cut next week is still possible, it just that state media has been focused on leaks of a Yuan1trn fiscal expansion via infrastructure that will likely be confirmed in the 2nd half of October. Such spending is effective in boosting GDP numbers, as it is committed. This contrast with the modest recent stimulus measures for the housing sector via reduction in deposits and lower mortgage rates. After an initial bounce, home sales have relapsed once again. Pessimism is ingrained in the household sector over the current property downturn and is unlikely to shift unless aggressive action is seen e.g. abandoning the three red line policy or nationalising all weak private developers to restore confidence. However, China authorities want to avoid the dependence on housing investment in the future and aggressive action appears unlikely. The problem is that infrastructure investment is a short-term fix and does not boost consumer confidence and spending. China authorities appear biased against cyclical consumer boost (e.g. transfer payments to households) and are slow in structural fixes to reduce precautionary demand for savings (e.g. better healthcare/unemployment and pension support).
Policy stimulus should boost China economy in Q4 and into early H1 2024, but it will probably not reach a 5% annualised pace. The residential property sector will remain a negative influence on GDP, due to less housebuilding and less employment/steel production. In addition, China consumer will remain cautious and the pent up demand wave could taper into 2024 (the golden week travel was up substantively on 2022, but below expectations). We maintain our 4.0% 2024 GDP forecast (here).