China CPI and November/December Easing?
The October China CPI at -0.2% Yr/Yr was tempered by falling pork prices, but the core at 0.6% Yr/Yr shows that inflation is not a constraint to further stimulative policy. However, after recent fiscal policy expansion, further monetary easing will likely be selective rather than aggressive. Scope exists for more monetary easing in November or December, before more rate cuts are slowly delivered in 2024. An RRR cut is the next likely step, given the PBOC has just endorsed a large rate cut for existing mortgages. A 40% chance exist of a 10bps MTF cut next week, though we favour this arriving in December.
Figure 1: China Headline and Core CPI inflation
Source: Datastream
Pork prices helped to drag the headline inflation down, as excess pig production continues to be evident in the farming sector. Core CPI inflation at 0.6% remains a better indication of the underlying inflation momentum, which argues against the idea of outright deflation. The breakdown of the core shows that travel remains 11% Yr/Yr and that items such as durable goods remains subdued (price competitiveness to keep consumption going). China economy is also suffering from excess production, both as exports are being curtailed (global slowdown/switch of supply chains) and insufficient private sector demand. This goes hand in hand with the lack of resilience of private sector GDP.
SOE and Local governments are provide some momentum for GDP, boosted by the October announcement of Yuan 1trn package of money for local government infrastructure investment including disaster relief and protection. This has stabilised the downward revisions in 2024 GDP forecasts, as most of the effects of the fiscal package will likely be evident in 2024. Indeed, the IMF earlier this week revised up the 2024 GDP forecast from 4.2% to 4.6%, partially on the back of the fiscal package. However, private residential investment will likely remain an absolute negative for GDP, while net exports are unlikely to rebound as global companies switch some supply chains to other countries (e.g. Vietnam/India/Mexico).
Further monetary policy easing would help underpin GDP growth and more is certainly required to reach 5% GDP growth in 2024. However, China authorities have indicated that policy stimulus remain selective rather aggressive, as they want to move to new economy sectors from property and older industries. Further uncertainty has been created by President Xi recent visit to the PBOC and whether this endorses caution or a quicker easing pace. Some focus is now on the next easing step from the PBOC between a further 10bps cut in the medium-term facility (MTF) rate or a further 25bps cut in the reserve requirement rate.
The sensitivity of China authorities to Yuan losses would argue more in favour of an RRR rather than MTF cut. Additionally, the PBOC agreed to an average 0.73% cut in existing mortgage rates for 50mln households (around Yuan 22trn) in early November according to Xinhua and this is an alternative to an MTF cut. An RRR cut is the next likely step, given the PBOC has just endorsed a large rate cut for existing mortgages. A 40% chance exist of a 10bps MTF cut next week, though we favour this arriving in December. Further rate cuts remain likely in 2024, though we would see them as being no more than 30bps in total, as China authorities remain strongly opposed to ultra-easy monetary policy.