MNI: PBOC Seen Tightening If CPI Rises Over 3%; Control Credit

The People's Bank of China is likely to keep liquidity stable unless the consumer price index rises over 3% year-on-year while continuing to restrict further credit expansion in the hot property market, policy advisors told MNI, an approach aimed at supporting growth and curbing major risk.

Monetary policy has the challenge of dealing with imported inflation when domestic demand is still weak and the PBOC can hardly tighten both liquidity and credit at the same time in a recovering economy, said Li Gang, senior fellow at National Institution for Finance & Development. He added that the policy stance for the current quarter can be summarised as stable liquidity and structurally tight credit, which will have the added benefit of damping inflation by reducing prices of houses, and thereby raw materials, in the medium and long term.

Looking ahead, the central bank may tighten policy marginally if CPI rises above the 3% target in any month or relax credit controls if total social financing falls well below 11%, Li said. However, while consumer prices may rise somewhat in the second half with a partial pass through of higher PPI, a recovery in pork prices, and higher costs for services as Covid eases, inflationary pressures won't be major, he added.

TSF fell to CNY1.85 trillion in April from CNY3.34 trillion in March, a level below market expectations, while outstanding TSF rose 11.7% y/y from March's 12.3%. Although the drop was largely due to the base effect, analysts still see it as a sign of credit tightness.

HIGHER FOR LONGER

Bond market liquidity may tighten at the end of Q2 and Q3 from current ample conditions as more government bonds are issued and yields would edge up from the current 3.1%, Li expects.

Zhang Junwei, a vice-director of a research body attached to the State Council, said the 6.8% surge in factory gate prices in April was surprising and inflation may stay high for longer than expected, which would burden recovering small and medium-size companies, especially if export growth slows.

If regulators cannot effectively control upstream prices and incomes remain soft, then investment would be sluggish and damp economic performance, he said, noting that policy makers may have to boost demand by easing marginally in the second half. He added the government may have to tolerate a moderate rise in inflation in that case.

A policy advisor familiar with policy-making who asked for anonymity said that for the whole year, PPI would print at 5% y/y while CPI would register below 2%.

EXPORTS

Although exports, a key factor in the recovery so far, may grow at a slower pace for the rest of the year, the economy will be supported by recovering consumption, Li said. Production in western countries, particularly in the U.S, is resuming and partly explains why China's Q1 GDP was below expectations as industrial output growth slowed in March as compared to previous months, Li said.

Still, the pandemic situation in developing countries such as India may reduce competition for Chinese exports, the anonymous advisor said. He expects full-year GDP of about 8.5% with Q2 at 8% and Q3 at 6%. In 2022, GDP will grow about 5%-6%, he said.