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China reaction: LNY seasonal volatility, divergent pressures

  • 11 March 2024 (3 min read)
Premier Li Qiang set China’s annual growth target for the year at “around 5%” for 2024, as he opened the annual National People’s Congress earlier today.
The fiscal deficit was set at 3% of GDP for this year, the same level as initially targeted in 2023. In addition, RMB 1 trillion central government special bonds and RMB 3.9 trillion local government special bond were announced.
The proposed fiscal package was not a surprise. That said, it did not ease market concerns on deflation.
Monetary policy is likely to stay easy and coordinate with the fiscal measures. Further rate cuts are expected in the coming months, especially in H2 after easing cycles are expected to have begun in other major economies.

Positive seasonality on consumer prices, yet weaker than before

China's Consumer Price Index (CPI) reversed its four-month deflationary trend in February, rising into inflationary territory thanks to holiday seasonality from the Lunar New Year (LNY). Headline CPI grew by 0.7% yoy, up from -0.8% in January, surpassing market expectations of a rise to 0.3%. On a monthly basis, inflation rose by 1.0%, compared to 0.3% in January. Core CPI inflation, excluding fuel and food, increased by 0.8 percentage points to 1.2% yoy in February. Within that, pork prices rose by 0.2% - the first positive since May 2023, although overall food prices dropped by 0.9%. Prices of consumer goods dropped by 0.1%, improving from -1.7% in January, while price in services expanded further by 1.9%, compared to a 0.5% increase in January.

The notable volatility in the last two months’ CPI prints largely reflects LNY seasonality, as this most important holiday celebration fell in January in 2023 but in February this year, adding a more favourable base effect to the latest print. Yet despite this seasonal volatility a weakness in prices persisted. The year-on-year growth rate stayed 1.2 percentage points below the 5-year average of CPI in the month of LNY. Additionally, the continuous price divergence between consumer goods and services underscored ongoing subdued consumer sentiment.

Of course, the stabilisation in pork prices also contributed to the rise in overall consumer prices, having contributed heavily to the recent month’s deflation. As a country that consumes the most pork in the world, pork prices account for around 2% of China’s headline CPI, according to our estimation. Thanks to the recent reduction in supply and surge in pork demand during LNY, pork prices expanded for the first time in nine months and are likely to remain more positive for the coming year. 

Same seasonal volatility, but affecting PPI in the opposite way

Product Price Index (PPI) inflation dipped further in February to -2.7% yoy (Jan: -2.5%), worse than market expectation (Consensus: -2.5%), marking its 17th consecutive deflationary month. On a monthly basis, headline PPI declined by 0.2% mom, the same as in January. PPI inflation in producer goods declined further to -3.4% yoy from -3.0% in January, contributing approximately 2.51 percentage points fall in the headline PPI. Consumer goods continued to ease, recording -0.9% yoy, from -1.1% in January.

The recent deepening in PPI deflation is likely to be partly attributed to the subdued demand in industrial material exacerbated by the LNY holiday factory shutdown period. Ferrous metal smelting and pressing saw a decline of 0.4% mom compared to a rise of 0.4% in January, reflecting a slowdown in industrial and construction activities. Additionally, slightly weaker global commodity prices exerted further downward pressure on China’s PPI print.

The prolonged weakness in producer prices underscored the overcapacity in industrial sectors, which may have been exacerbated by soft demand in consumer sectors and the ongoing correction in the real estate sector. Until consumer confidence is restored and real estate market stabilises, both factors are likely to continue weighing on China’s PPI.

NPC announcement met market expectations – failed to lift pessimism 

Last week, Premier Li Qiang set the economic growth target at “around 5%”, along with other fiscal measures for this year. As markets had expected, the announcement failed to provide supports to the consumer sector, which is much needed to boost prices and the economy in a more sustainable manner. Given the current policy stance and weakness in prices, we expect the headline CPI for the year to remain soft, averaging around 0.6% for 2024.

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