Softer Factory Inflation Leaves PBOC Focus on Debt, Not Prices

China’s producer-price index slid to the lowest level since November 2016 last month and consumer price growth remained largely stable, taking pressure off the People’s Bank of China to restrain inflation even as it raises market borrowing costs to curb debt growth.

– Producer price index rose 4.9 percent in December from year earlier vs projected 4.8 percent rise in a Bloomberg survey and 5.8 percent in November
– The consumer price index climbed 1.8 percent, the statistics bureau said Wednesday, compared with median forecast of 1.9 percent

While a sustained moderation in factory inflation in China would put a question mark over the strength of global reflation, it also leaves domestic policy makers with a freer hand to conduct ongoing campaigns against industrial over-capacity and pollution.

“Price pressures remain contained in China, easing pressure on the PBOC to tighten policy,” said Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong. “Cooling PPI inflation reflects slowing construction activity, while at the consumer level pricing power continues to be constrained.”

What Our Economists Say
“Looking ahead, factory inflation is set to slow further, crimped by unfavorable base effects, continued overcapacity in some industrial sectors, and uncertainty about the outlook for commodity prices,” according to Fielding Chen at Bloomberg Economics in Hong Kong. “Lower readings for the PPI, which translate to weaker industrial profits, could make the deleveraging process more painful.”

Food prices posted the first decline since 2003 last year, falling 1.4 percent. Full-year data showed producer prices rose 6.3 percent and consumer inflation gained 1.6 percent in 2017.

Economist Takeaways

“I am not worried about the decline of headline PPI as it registered a strong sequential increase of 0.8 percent on the month,” said Raymond Yeung, chief greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. “Our forecast is for it to rise by 4.8 percent in 2018. Given the cold weather in the recent weeks, energy prices are supportive. We also believe the CPI to pick up in January. China’s inflation outlook will pick up gradually.”

“There’s a lot of uncertainty shrouding the outlook for China’s CPI and PPI in 2018,” said Larry Hu, chief China economist at Macquarie Securities Ltd. in Hong Kong. “China’s economic growth, which is a main factor influencing PPI, is hard to predict as it will be influenced by how tough the deleveraging campaign is and how far the slowdown in the property market will go. The PBOC will be on wait-and-see mode at least in the first three months of 2018, as it needs to see more economic data before deciding whether to tighten or loosen monetary policy.”

“I don’t see where 2018 inflation is coming from,” says Christopher Balding, an associate professor at the HSBC School of Business at Peking University in Shenzhen. “2017 came from commodities and those are relatively flat year-on-year compared to their 2017 levels. We should see continued declines in the PPI.”
Source: Bloomberg