MNI EXCLUSIVE: China CPI To Turn Positive In 2H: Advisors

China's consumer prices may remain in negative territory through the first quarter or even the first half of next year when the base effect of higher pork prices will start to fade and spending recovers further, policy advisors told MNI, adding that the short-lived decline is unlikely to draw any action from the central bank.

Annual CPI may grow 1-1.5% in 2021 with the decline reversing from Q2 and rising gradually in the second half, said Wang Jun, an academic committee member at the China Center for International Economic Exchanges (CCIEE).

"The high base of pork prices will suppress CPI until Q1," said Shen Jianguang, a former visiting scholar at the People's Bank of China and now chief economist at JD Digits. While the current downward pressure on prices may be higher than market expectations considering the decline in the non-food category, he expects the economic recovery to support a gradual pick up in the second quarter.

China's CPI fell 0.5% y/y in November for the first time in 11 years, mainly due to lower food costs, especially pork prices, which plunged 12.5% as supplies recovered after last year's swine disease and contributed 0.6 percentage point to the index's decline. Shen noted that non-food prices also fell by 0.1% in November for the first time since December 2009.

DEMAND

The impact of pork prices will gradually decrease as hog production has recovered to more than 80% of normal levels and regardless of the base effect, prices will remain stable as there is no major shock disrupting overall supply and demand, said a researcher at a government-back think tank, who requested anonymity. Although demand is still weak as residents' income and corporate profits lag the recovery, there is no basis for a broader price decline, the source said.

Zhang Yongjun, deputy chief economist at CCIEE, believes deflation risks will increase if prices stay negative for over six months. Any CPI increase next year will be moderate, he said, pointing to the lagging impact of an elevated CPI above 4% in Q1 this year. "The tail effect may ease a bit in April and May, providing a chance for CPI to turn positive, but it could still be difficult," he said. Much will also depend on how well consumption recovers, Zhang added.

Wang, who is also chief economist at Zhongyuan Bank, pointed to the weak core CPI (excluding food and energy prices), which stood at 0.5% for five consecutive months, and said worries about an interest rate hike next year are unnecessary.

The PBOC is gradually normalising policy after its pandemic-related easing and is focused more on stabilising the leverage ratio and preventing risks, the advisors said.

"The central bank will maintain reasonable liquidity given that the economy is still recovering into next year," Wang said. Though GDP may grow around 8% in 2021, it will be mostly due to the low base and will not be interpreted as overheating, he added.