MNI: Pork Prices To Push China CPI To About 1% In H2 - Advisors

China's rising pork prices will drive consumer inflation to about 1% in H2, while a reversion of falling factory-gate prices may depend on whether property can stabilise, advisors and analysts told MNI, adding further fiscal efforts to boost demand were needed due to monetary-policy constraints.

Pork prices have risen since May to an 18-month high and will continue to support CPI, which rose 0.3% y/y last month, to above 1%, but lower demand for other foods and services will limit a faster rebound, said Wei Hongxu, analyst at the ANBOUND think tank.

The Producer Price Index fell for the 20th consecutive month by 1.4 percentage points in May, but narrowed from the previous month's 2.5% decline. However, it will likely turn positive within the year supported by the lower comparison base effect, Wei told MNI.(See MNI: China Exports Strong In H2, Despite Diverging PMIs)

The accelerated issuance of government bonds in H2 to fund infrastructure projects will also drive up prices of industrial goods and some commodities, he added.

WEAK DEMAND

However, Xu Hongcai, deputy director at the China Association of Policy Science’s Economic Policy Commission, said overall weak demand will limit CPI from rising above 1% this year.

“Daily necessities are mostly oversupplied, while spending on big-ticket items and housing-related consumption are tamed by weakened income expectation,” said Xu.

PPI could find improvement difficult in H2 as the property market takes another two-three years to bottom out, Xu continued, estimating the metric could fall print between -1-0% over H2.

Real-estate investment dropped further by 10.1% y/y in the Jan-May period to hit an over four-year low, while new home prices in 70 major cities last month dropped by 0.7% m/m – the steepest decline since October 2014.

FISCAL EFFORTS

The People’s Bank of China will find it difficult to cut rates any time soon, the economists agreed. (See MNI PBOC WATCH: China LPR To Hold On PBOC's Cautious Stance)

However, Xu questioned whether further monetary easing would boost consumer demand as about 90% of new credit flowed to enterprises – especially asset-heavy industries, such as infrastructure and manufacturing – with residential long-term loans accounting for the remainder. A 60-40 split is more reasonable, Xu argued.

“The government would need to walk away from the policy inertia of relying on large-scale investment to buoy growth and push forward reforms to increase residential income and social security to revive consumer confidence gradually,” Xu added.

Authorities should give more fiscal subsidies to lower-income groups as they will spend the funds faster, Xu said, noting current measures mainly target the middle class. Retiring farmers in 2024 will receive a pension of less than CNY200 a month, Xu added.

Shen Jianguang, adjunct professor at Fudan University, suggested authorities should extend the old car trade-in scheme to high value-added commodities, such as home appliances, furnishings, computers, and mobile phones.

Meanwhile, the central government should increase funding support by allocating part of the funds from special-treasury bonds, or the central bank could consider establishing a relending facility to alleviate local-government funding pressure to help promote these schemes, Shen suggested.

Wei added a single reduction to the reserve requirement ratio will not boost demand that much, however, room exists for a rate cut subject to the timing of a Federal Reserve move lower.