MNI: Soft China Inflation To Persist, Oversupply Will Weigh

China’s headline inflation rate will remain weak this year as consumption and the property sector improve moderately, while manufacturing oversupply will likely weigh on future prices over the long term, policy advisors and economists told MNI.

The Consumer Price Index (CPI) could increase by Q2 after a challenging Q1, impacted by weak consumption due to low household income growth, a soft employment market and sluggish rental prices, said Cao Jing, associate research fellow at the Chinese Academy of Social Sciences’ Institute of Finance and Banking. She predicted CPI would rise by 1-1.5% y/y in 2024.

According to the National Bureau of Statistic, CPI printed at 0.2% y/y in 2023, its lowest growth since 2009. The metric declined by 0.3% in December, the third consecutive monthly decrease. Former PBOC Governor Yi Gang told reporters last March that CPI at 2% y/y in 2022 was an “ideal level” and the country has continually set an “around 3%” CPI target over the past decade.

However, some advisors believe 2% CPI expansion inadequate. Yu Yongding, a seasoned economist and former PBOC monetary policy committee member, wrote this month 3-4% or higher CPI was appropriate and policymakers should take easing measures “without hesitation” should it fall below 2%. (See MNI: PBOC Seen Easing MLF, Repo Rates Later In 2024)

China Minsheng Banking Corp Chief Economist Wen Bin said authorities cannot ignore imported inflation this year as major economics start re-stocking and push up commodity prices. This, combined with increased pork prices, could drive CPI to rise about 1%, helping alleviate disinflationary pressure, he said.

POLICY EFFECTS

Low inflation has impacted the effectiveness of monetary policy and the economy’s performance, pushing up real interest rates, curbing credit demand and offsetting the practical effects of the central bank’s rate reduction, Cao warned. The soft inflation has also lowered nominal GDP growth, resulting in a higher debt/GDP ratio, she added. (See MNI: China To Pursue Moderate Policy Support In 2024)

According to the National Institution for Finance and Development, nominal GDP hit 4.6% y/y in 2023 – the lowest read in two decades outside of the pandemic years – driving the leverage ratio 13.5pps higher to 287.8% from 2022’s 274.3%. A recent report by the China Finance 40 Forum, noted real GDP would rise by 1.4pps and nominal GDP by 3pps should China increase CPI to 2%.

However, shoring up prices via accommodative policy may prove difficult.

An advisor told MNI the impact of current policies had disappointed due to weak credit demand driven by de-risking and low appetite. Soft demand and oversupply had added to the tepid inflation, and policy easing cannot do much to solve the oversupply, he argued.

Cao Yuanzheng, chairman of BOC International Research, told MNI the country may fall into a low inflation trap for years should manufacturing oversupply continue. China’s huge production capacity will inevitably lead to excess should exports to the U.S reduce, he added.

Domestic demand will not be able to absorb the excess supply, mostly a product of traditional manufacturing, considering Chinese consumers spend more on services rather than goods as their incomes rise, he said. Any soft inflation, or deflation, triggered by oversupply will give policymakers a serious headache, he commented.