Across The Border

Chinese CPI to moderate further but no easing policies in sight

Pork prices play a key role in deciding the country’s inflation readings

PUBLISHED : Friday, 12 August, 2016, 12:48pm
UPDATED : Friday, 12 August, 2016, 9:59pm

China’s Consumer Price Index inflation is expected to moderate further this year, say market watchers, who also think they will be disappointed in their expectations of more monetary easing.

CPI is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. Changes in the CPI are used to assess price changes associated with the cost of living.

CPI inflation edged down to 1.8 per cent in July from 1.9 per cent in June, with food inflation easing as lower pork prices offset the impact of the rising cost of vegetables, higher due to recent heavy rain and flooding.

Vegetable price inflation hit 3.8 per cent in July, but other food costs largely moderated, with meat, fruit, eggs and milk all falling.

The first six months had witnessed a 28.1 per cent surge in the spot pork price in China – the world’s largest consumer – against last year, while the price started falling in early June.

“I really made a fortune from raising pigs in the first half of this year,” said Lu Jia, a small-scale operator in the central Chinese province of Hunan.

“In May, I bought a new BMW, worth 200,000 yuan, and spent the whole of July on a driving holiday with my wife.”

Life sounds good.

But Lu has now been forced to cut his pig-rearing business, and does not expect to earn much from that in the second half, because demand has continued softening over the summer.

“I don’t see another pork-price rally any time soon,” he added.

“And I may have to cut my pig business further, and move into another business to make money in the coming months.”

Nomura has now trimmed its full-year CPI inflation forecast for China to 2.1 per cent from 2.3 per cent, said research analyst Yang Zhao.

“Food price inflation did not rise by as much as we had previously expected. The flooding this year turning out not to be as destructive as in 1998, as the rain has already moved on from the south.”

Citic Bank International chief economist Liao Qun also expects stability for the CPI, and is predicting 1.8 per cent in the second half, with vegetable prices eventually dropping.

Xu Gao, an analyst from Everbright Securities, is confident, too, the current rising vegetable prices will not be sustained, and expects pork prices to drop further.

“Pork prices will continue to drop in August after those consecutive rises in previous months,” Xu said in a report.

With lower food price increases, the inflationary pressures are expected to ease further
Xu Gao, an analyst from Everbright Securities

“With lower food price increases, the inflationary pressures are expected to ease further.”

Liao from Citic Bank International said lower food prices essentially guarantee lower inflation.

“And lower inflation eases pressure on Beijing when it comes to official monetary policy,” he added. “But how much stimulus is needed, and what form it should take, mainly depends on economic growth.”

China’s economy grew by 6.7 per cent in the second quarter and Liao warns potential risks still exist.

“The Brexit will certainly drag down China’s exports, and that hasn’t been fully reflected in the numbers yet,” he said.

“The continuous decline in fixed asset investment is also a concern.”

Growth in fixed-asset investment by the private sector, arguably the best gauge of business confidence as it measures expansion plans, slumped to 2.8 per cent nationwide in the first half from 3.9 per cent in the first five months.

In the government’s second quarter Monetary Policy Report released last Friday, China’s central bank said its inflation outlook was relatively stable.

The official Xinhua news agency said in an editorial on Wednesday that China was unlikely to announce any aggressive monetary easing for the rest of the year, as it would hamper efforts to reduce industrial overcapacity and remove asset bubbles.

“Market anticipation for more cuts is rising as moderate consumer inflation in July offered sufficient room to manoeuvre,” Xinhua said.

Those hoping for cuts, however, will probably be disappointed.

In Wuhan, a central city hammered by the summer storms, housewife Lily Du confirmed her fruit and vegetable and costs have dropped since the flooding in July.

“However, it’s only been a slow decline, and prices are still much higher than last year,” she said.

With the effects of widespread crop failure already cutting supplies, she reckons it’s only a matter of time before prices start rising again.