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BEIJING (MNI) - Despite growing concerns among Chinese bond investors about
the domestic inflation outlook, China analysts generally expect price pressures
to remain relatively modest next year.
The yield on 10-year China government bonds (CGBs) rose rapidly in October,
in part due to growing worries about the Chinese price outlook following the
19th Communist Party Congress last month. At the Congress, President Xi Jinping
underscored the government's commitment to reduce excess industrial capacity and
rein in pollution, both of which would tend to reduce supply and so increase
However, analysts with 10 Chinese financial firms generally agreed that
prices would remain under control in 2018. Nine of the ten predicted headline
CPI would not exceed 2.5%, with two even expecting CPI to be lower than 2%. The
one analyst who expected 2018 CPI to be higher than 2.5% said it would not
Chinese CPI rose 1.6% year-on-year in September, down from 1.8% in August.
October CPI data is due to be released on Thursday.
One key factor worrying bond investors is the recent rise in oil prices.
The price of WTI crude has risen nearly $15 per barrel since August, reaching
$56.97 per barrel on Wednesday.
"If OPEC reaches agreement to cut their production again, the oil price
could move up to $60 per barrel. However, the supply of shale oil will also go
up as oil prices go up, so that will partly offset the impact of OPEC production
cuts, so we don't expect the oil price will go up a lot," Xu Hanfei and Liu Yu,
analysts at China Merchant Securities, said in a report published last weekend.
"And a $10 rise of the oil price would not have a significant impact on the
consumer price index."
In addition to the direct impact on the CPI, a rise in oil prices would
theoretically lead to a higher producer price index (PPI), boosting consumer
prices via higher production costs. However, this transmission mechanism breaks
down in China.
"From January 2016 to now, the Brent crude price has risen 82.6%, OPI
mining prices are up 31.8%, PPI raw material prices have risen 16.0%, while the
processing industry price index only rose 9.2%. You can see that the impact of
the rising crude oil price has been absorbed during the transmission process,"
Han Ping and Qi Sheng, analysts at Zhongtai Securities, argued in a report
published over the weekend. "The transmission mechanism from PPI to CPI is
blocked even more. From 2014 to 2015, the PPI fell 11.6%, while the CPI fell
only 0.6%. During 2016 and 2017, the PPI rose 11.4%, while the CPI rose only
0.8%. The CPI has generally remained stable."
"The price of raw materials rose due to the impact of supply-side demand
and the campaign to cut excess capacity, while the demand side remained
generally stable, making it very difficult for higher PPI to lead to higher
CPI," Han and Qi argued. "Unless demand grows significantly, CPI will not face
major upward pressures."
Ming Ming, an analyst at CITIC Securities, estimated that the influence of
higher oil prices might cause the CPI to rise to 2.5%-3.0% in 2018.
But other analysts argued that PPI growth could decelerate sharply in 2018,
holding down CPI.
"We estimate the price of steel will likely decline gradually and the price
of crude oil will also fall to around $53 per barrel due to more supply from
shale oil," Meng Xiangjuan and Qin Tai, analysts at Shenwan Hongyuan Securities,
said last week. "Given that the campaign to cut excess capacity has almost
finished and the price of steel will go down slightly, we think the price of
coal might go down slightly as well."
"So throughout 2018, average PPI might fall below 1.0%," Meng and Qin
predicted, compared with an average of 6.5% in the first nine months of this
Price increases for medical care, a key factor pushing up CPI this year,
will likely decelerate next year.
In September, consumer prices for medical care increased to 7.6% y/y from
5.9% in August, meaning headline September CPI would have been below 1.0% if the
medical price component had been taken out, CICC estimated. Medical service
prices jumped 9.2% y/y in September, up from 6.4% in August.
So far this year, medical care prices are up 5.2% y/y, much higher than the
average increase of 3.8% in 2016.
"The rising price of medical care has to do with medical care reform,"
China International Capital Corp. (CICC) said in a report last weekend. "Medical
care prices will not maintain such rapid increases, and the cycle of rising
prices will end because medical care reform has been nearly fully implemented."
A new round of medical care reform started in 2017, aiming to increase
charges for medical services while bringing down the price of medications.
Another worry for bond investors comes from the potential rise in food
prices in 2018. Food prices make up about one-third of the weighting in the
consumer price index.
Non-food CPI has been relatively high so far this year, remaining above 2%
from January to September. However, food CPI growth has been negative since
February this year, dragging down headline CPI growth.
"Grain prices have been the main factor lowering food prices and the price
levels have been relatively low. According to our estimates, grain is the second
most powerful factor affecting overall CPI, only weaker than oil prices," CICC
said. "Since the fourth quarter last year, grain prices have increased
continuously ... so it is natural for investors to worry about inflation next
"However, grain prices will not put huge pressure on inflation next year.
Corn might add some price pressures later this year and early next year [due to
a slight contraction of supply and higher demand from feed and industries],
while wheat and rice will have a negligible impact on food CPI next year [as
both have high inventories]," CICC said. "Pork and vegetable prices might rise
more sharply than grain prices, leading to higher, but not too high, CPI
Other analysts predicted the price of pork, a major swing factor in
consumer prices in recent years, might also decline.
"Historically, every round of inflation has been pushed up by rising food
prices," said Dong Dezhi and Li Zhineng, analysts at Guosen Securities,
estimating that inflation could very possibly come in below 2% next year. "Food
prices are determined by the inflation expectations of farmers."
According to Dong and Li's estimates, the life cycle for pigs -- from birth
to slaughter -- will be 192.4 days in 2017, lower than the 200.1 in 2016 and
much lower than the peak of 255.7 in 2011. The life cycle of pigs is an
indicator of farmers' inflation expectations, with farmers increasing their
inventories and the life cycles of their pigs if they expect inflation to rise.
"As economic growth is unlikely to go up significantly next year, farmers'
disinflationary expectations might continue and the life cycle rate for
agricultural products will be faster and thus increase food supply and alleviate
inflation pressures," Dong and Li wrote.
Companies 2018 CPI Predictions
CICC Macro 2.5%
CICC Fixed Income Slightly Above 2%
Orient Securities 2.2%
China Merchant Securities 2.2%
Hua Chuang Securities 2.5%
Guotai Junan Securities 2.5%
Tianfeng Securities Under 2%
Guosen Securities Under 2%
Zhongtai Securities 2.2% - 2.3%
CITIC Securities 2.5% - 3.0%
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