China’s economic risks are building in the second half of the year, with growth set to slow while inflation pressures are picking up, clouding the outlook for central bank support.
A report Monday showed factory-gate inflation surging again to 9% in July as commodity prices climbed, while core consumer prices -- which strip out volatile food and fuel costs -- rose the most in 18 months. At the same time, the spread of the delta variant is threatening China’s growth outlook, with Goldman Sachs Group Inc. downgrading its forecast for the third quarter and full year.
The latest developments are another complication for policy makers, who have already pledged ongoing fiscal and monetary support for the economy in the second half of the year. While some economists see inflation risks limiting the room for central bank easing, many see the uncertain growth environment as a bigger worry, with more support likely to come.
“As the outbreak unfolds, China’s domestic demand will weaken, and the overall inflation pressure will decline,” said Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group Ltd. “Even though prices are still high, they won’t have much momentum to rise further, so it won’t create a huge constraint on monetary policy.”
Chinese government bonds extended losses after the data, with the yield on the 10-year security rising 4 basis points, the most since January, to 2.85%.
The jump in factory-gate inflation was largely due to higher commodity prices, in particular oil and coal. Beijing has been trying to quell the surge in commodity prices by releasing inventory from the nation’s strategic reserves, cracking down on hoarding and speculation, and ordering state-owned enterprises to limit their exposure to overseas commodities markets.
For a breakdown of the PPI figures, click on this table
Core CPI rose 1.3% in July from a year ago, suggesting domestic demand is getting stronger. Food prices declined 3.7% from a year ago, mainly due to a 43.5% plunge in pork prices, a key item in the CPI basket.
“PPI will probably be around 6% by the year-end. This will to some extent limit the room for monetary easing,” said Zhou Hao, senior emerging markets economist at Commerzbank AG in Singapore. “The possibility of a rate cut is extremely small.”
Trade Risks
Latest trade data also showed an easing in global demand, another headwind for China’s growth. Export growth slowed to 19.3% in July, missing forecasts, the customs administration said Saturday. Extreme weather conditions and local Covid outbreaks have disrupted production and shipping in parts of China, while record-high freight costs have squeezed exporters’ profits.
“This puts the policy makers in a dilemma: inflation is rising and growth is slowing,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management. “The pandemic worsened and caused more disruption in the global supply chain.”
China’s zero-tolerance approach to controlling the spread of the virus means more scrutiny on cross-border movement of cargo and travelers, which will probably put further stress on the supply chain, he said.
Speculation is rising that the central bank will ease policy again after a surprise move in July to cut the reserve requirement ratio for banks. The Communist Party’s top leadership pledged more targeted support for the economy at a Politburo meeting late last month, reiterating a commitment to stabilize commodity prices and to provide more effective fiscal spending in the second half.
“The focus of monetary policy in the second half of the year may be tilted toward stabilizing growth again, as the overall increase in CPI is limited and PPI gradually falls,” said Wang Jingwen, a macro analyst at China Minsheng Bank.
— With assistance by John Liu, Lin Zhu, Yujing Liu, and Wenjin Lv