China Economy: Inflation risk is low as pro-growth should be the priority

10Nov2022 CMBInternationalGlobalMarkets|EquityResearch|EconomicPerspectives ChinaEconomy Inflationriskislowaspro-growthshouldbethepriority BingnanYE,Ph.D(852)69895170yebingnan@cmbi.com.hk YoY(%)16 141210 86420 (2)(4)(6) 20192020202120222023 CPIPPI Source:Wind,CMBIGM YoY(%)YoY(%) 340330220210101(10)0(20) (1)(30) 2019202020212022 CoreCPI(LHS) Food(RHS) Fuelsforvehicles(RHS) Source:Wind,CMBIGM China’sinflationwaslowerthanexpectedinOctober.Energy&metalpricesdeclinedasoverseasrecessionriskincreasedanddomesticdemandremainedweak.Meanwhile,durablesandhousingrentsawdeflationpressureasconsumerconfidencewaslowandtheunemploymentratefortheyouthwashigh.TheinflationriskshouldbelowforChinaasitspropertymarketandindividualconsumptionresumeveryslowlyandoverseaseconomyislikelytoseearecessionin2023.WemaintaintheCPIgrowthforecastfor2022and2023at2.1%and2.3%andchangethePPIgrowthforecastfor2022and2023from4%and1%to4.3%and0.6%,respectively.Pro-growthshouldbethepriorityforChinaasthecountrymighthavetoreopenitseconomyandmaintaineasingmacropoliciesnextyear. CPIgrowthwasbelowexpectationsasenergyinflationdeclinedandconsumerdemandremainedweak.Consumerpriceindex(CPI)rose2.1%YoYinOctober,downfrom2.8%inSeptember.TheCPIgrowthwasbelowexpectationsasenergy&foodinflationdeclinedandconsumerdemandremainedweak.TheYoYgrowthofgasolineandpublicutilityrespectivelydeclinedfrom19%and2.5%inSeptemberto12.4%and0.5%inOctober.Foodpriceindexrose7%YoYinOctober,downfrom8.8%inthepreviousmonth.CoreCPIgrowthremainedlowat0.6%inOctober,thesameasSeptember.Housingrentfurtherdecreased0.7%YoYinOctoberaftercontinuousdeclinesin2Q22and3Q22astheunemploymentratesremainedhighfortheyouth.Consumerdemandfordurableswasweakasvehiclepriceindexdropped1.5%YoYandthepriceofcommunicationequipmentslightlyrose0.3%inOctober. PPIsharplydeclinedascommoditypricesretreatedamidweakChineseeconomyandrisingglobalrecessionrisk.Producerpriceindex(PPI)dropped1.3%YoYinOctoberafterrising0.9%YoYinSeptember.Energyandmetalpricesdeclinedasdemandsoftenedandsupplyresumedamidpropertymarketslumpandzero-Covidpolicy.InOctober,PPIincoalmining,ferrousmetalandnon-ferrousmetalrespectivelydropped16.5%,21.1%and7.8%YoY.Meanwhile,durableconsumptionremainedweak.PPIindurablegoodsrose0.2%YoYandthepriceinautodeclined0.3%YoYinOctober,comparedtotheYoYdecreaseof0.6%and0.2%inSeptember.BusinessconfidenceandcapitalexpenditurewerealsoweakastheYoYgrowthofPPIingeneralequipmentslowedfrom0.4%inSeptemberto0.1%inOctober. China’sinflationriskshouldremainlowaspropertymarket&individualconsumptionresumesslowlyandoverseasrecessionrisesinfuture.BothCPIandPPIshouldseesomefluctuationsoftheirYoYgrowthratesinnextfewquartersduetochangesofbaseeffectandcommodityinflation.TheCPIgrowthmaypeakataround2.8%inJanuary,noticeablydeclinefromMarchtoJulyandmildlyreboundin3Qnextyear.ThePPIgrowthmayreboundinnextthreemonths,declinein1H23andriseagainin2H23.WemaintainourforecastfortheCPIgrowthat2.1%in2022and2.3%in2023andrevisetheforecastforthePPIgrowthin2022and2023respectivelyfrom4%and1%to4.3%and0.6%. PLEASEREADTHEANALYSTCERTIFICATIONANDIMPORTANTDISCLOSURESONLASTPAGE1 MOREREPORTSFROMBLOOMBERG:RESPCMBR<GO>ORhttp://www.cmbi.com.hk Policyimplications.TheinflationriskshouldremainlowinChinaaspro-growthisstillthepriorityforthecountry.TheGDPgrowthremainsfarbelowthepotentialgrowthaspropertymarketandconsumerdemandresumesveryslowly.ChinamayhavetograduallyreopenitseconomynextyearastheOmicronvirusmayspreadwidelyduringtheChineseNewYearholidayinJanuaryaspeopletravelandgatherasatradition.Meanwhile,Chinawillmaintainproactivefiscalpolicyandrelativelyeasingmonetarypolicyin2023.TheimpactofreopeningonlaborparticipationandinflationshouldbelimitedasotherAsianeconomiesindicate.Bothpropertymarketandconsumptionmaygraduallyresumeamideconomyreopeningandpolicysupport. THISDOCUMENTMAYNOTBEDISTRIBUTEDINTHEUNITEDSTATES,CANADA,THEPEOPLE'SREPUBLICOFCHINA(THE"PRC")(EXCEPTINCOMPLIANCEWITHTHEAPPLICABLELAWSANDREGULATIONSOFPRC)ORJAPAN.THISDOCUMENTHASBEENFURNISHEDTOYOUSOLELYFORYOURINFORMATIONANDMAYNOTBEREPRODUCEDOR Figure1:MoMChangesofChinaConsumerPrices MoM(%) Meat Communicationfacility ClothingEducation,culture&… GrainCoreCPI FoodHealthcareTransportationfacility ServicesResidenceGasoline CPI Figure2:ChinaAgriculturalProductPrice (2015=100) 150 140 130 120 110 100 90 Source:Wind,CMBIGM (2)0 20182019202020212022 246AgriculturalproductpriceVegetableprice Source:Wind,CMBIGM Figure3:ChinaPorkPriceandSupply (RMB/Kg)(mn) Figure4:ChinaFeedProduction&Hog-to-grainRatio (%)(X) 5535 5030 45 25 40 3520 3015 25 10 20 155 100 20152016201720182019202020212022 3520 3018 2516 2014 15 12 10 510 08 (5)6 2016 2017 2018 2019 2020 2021 2022 (10)4 Porkprice(LHS)Numberoflivehogslaughtered(RHS)FeedproductionYoY(LHS)Hog-to-grainraio(RHS) Source:Wind,CMBIGMSource:Wind,CMBIGM Figure5:ChinaCoreCPIGrowth&2YT-bondRates (%) 4 3 2 1 0 (1) 2016201720182019202020212022 CoreCPIYoY2YT-bondrates Source:Wind,CMBIGM Figure6:ChinaProducerPriceGrowthinCommodity YoY(%)120 100 80 60 40 20 0 (20) (40) (60) 2018201920202