MNI EXCLUSIVE: China CPI Could Fall Below 2% By Year-End

Cheaper food means Chinese consumer price inflation is likely to dip below 2% y/y by the end of 2020 and potentially go as low as 0%, policy advisors have told MNI.

Improved supply and a high 2019 base are driving a plunge in pork prices, noted Wang Jun, a member of the academic committee at China Center for International Economic Exchanges, who expects annual inflation to reach about 2% and is concerned about a detrimental economic impact should it weaken further. Combined with a negative producer price index, a weak GDP deflator and record low core CPI inflation of 0.5%, such a situation could be considered to be quasi-deflation -- a period of low price rises and anaemic demand, he said, adding that the People's Bank of China might step in.

"If the downward trend is confirmed, this would leave room for one or two small cuts in the medium-term lending facility rate or reserve requirement ratio, likely in Q4," said Wang, also chief economist at Zhongyuan Bank.

Maintaining relatively loose monetary policy would help to ensure continued economic recovery, said Zhang Bin, deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, with higher inflation rates helping to improve corporate profits and to restore government and citizens' balance sheets via increased tax revenues and salaries.

But any rebound in prices should be capped within the government's 3.5% inflation target, he cautioned.

LONGER-TERM SUPPORT

Inflation could fall below 1% barring a robust rebound in consumption, said Zhang Yongjun, deputy chief economist at CCIEE, who expected the rate to fall to "weak" levels below 2% by the end of 2020. But September's full reopening of schools should drive up spending, and consumer confidence will be boosted by China's strong progress in dealing with coronavirus, he said.

August inflation decelerated to 2.4% y/y from July's 2.7%, after rebounding for two months. PPI was -2.0% y/y, narrowing the 2.4% fall in the previous month.

But while China's short-term inflation outlook may be weak, structural factors should provide a floor over the longer term, keeping it in a band between 2% and 3%, said Chen Fengying, a former director of the World Economy Institute of China's Institute of Contemporary International Relations.

The country's 400 million-strong middle-income class is likely to double in size over the next 15 years bringing an explosive increase in consumption and driving demand, said Chen. Pork prices in particular are likely to see sustained upward pressure, she said.

Even though the country's internal inflationary drivers will be countered by a relatively low global inflation environment for commodities, China's economy is still in the growth stage and it will be some time before it encounters the sustained levels of low inflation currently faced by some developed economies, she said.

"It may take another 20 years to be like Japan." Chen said.

Economic recovery should continue into the first quarter of next year, said Zhang Deli, chief researcher at Yuekai Securities, who, in contrast to Wang, expected the PBOC's concerns over long-term risks to keep its stance unchanged.