Extra policy measures needed in China to boost consumption – UOB

Economist at UOB Group Ho Woei Chen, CFA, reviewed the recent higher-than-expected CPI figures in the Chinese economy.

Key Quotes

“China’s Consumer Price Index (CPI) surged to more than 7-year high at 3.8% y/y in October from 3.0% in September, coming in significantly higher than consensus forecast of 3.4%”.

“The driver was again pork prices which jumped 101.3% y/y (Sep: 69.3% y/y), the largest monthly gains on record (based on data available since 2005)”.

“Indicative of a weak demand outlook, core CPI (excluding food and energy) was unchanged from September at 1.5% y/y and services CPI remained subdued at 1.4% y/y in October (Sep:1.3% y/y)”.

“Overall weak demand was also reaffirmed by the continuing decline in the Producer Price Index (PPI) which fell for the fourth straight month in October at -1.6% y/y, “¦ the largest decline since July 2016 when China’s factory prices were in a period of deflation”.

“Notwithstanding the surge in CPI, the weaker demand-side price pressure suggests that more policy measures are necessary to boost consumption in the Chinese economy as growth is expected to slow further. We expect China’s GDP growth to moderate to 5.9% in 2020 from 6.1% this year. After People’s Bank of China (PBoC) cut the 1Y Medium-term Lending Facility (MLF) rate by 5 bps to 3.25% last week, we anticipate that the Loan Prime Rate (LPR) which is pegged to the MLF to fall by 5-10 bps at the upcoming monthly fixing on 20 November. The central bank is expected to continue its gradual pace of monetary easing including further reductions to the banks’ reserve requirement ratio (RRR) ahead”.