China's slowing price growth may prompt looser monetary policy

The consumer price inflation (CPI) moderated to 1.9% in December 2018 from 2.2% in November.

There may be room for Chinese policymakers to loosen their monetary and fiscal policies to support the slowing economy amidst subdued inflationary pressures, according to a report by Fitch Solutions.

China’s consumer price inflation (CPI) moderated to 1.9% YoY in December 2018 down from 2.2% YoY in November which brings the 2018 average to 2.1%. Fitch Solutions attributed the softer consumer price growth to weak energy prices, with the National Bureau of Statistics (NBS) stating that gasoline and diesel prices fell 0.5% and 0.3% respectively, in December 2018. Core CPI remained steady for the third straight month at 1.8% YoY as of December 2018.

Producer price inflation (PPI) decelerated -0.9% YoY in December 2018 from 2.7% YoY in November which brought the average in 2018 to 3.5%, the report noted, citing how it was also driven by lower oil prices.

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“Together with the oil and gas-related segments, ferrous metal smelting, non-ferrous metal smelting and coal mining combined subtracted approximately 1.7 percentage points (pp) from the YoY PPI figure in December 2018,” Fitch Solutions added. “A pick-up in oil prices will likely be negated by weakening demand from slowing real gross domestic product (GDP) growth over the coming quarters, underpinning our 2019 average PPI forecast of 1.8%.”

China’s trade activity is forecasted to also remain subdued in 2019 given that the strong export growth momentum seen in the first three quarters of 2018 dissipated in Q4 as the front-loading of goods faded, Fitch Solutions said.

“A peak in global growth will be a key driver of weak export demand, in part resulting from a re-escalation in US-China trade tensions following the end of the 90-day truce in trade disputes on 1 March,” the report observed. “China’s large and all-time high trade surplus with the US is likely to come at the ire of Washington, and our expectations are that both parties will continue to find it difficult to reach a compromise due to their divergent stance on various policies.”

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Moreover, Chinese total imports performed poorly in December 2018, shrinking 7.6% YoY which is the weakest level since August 2016. Fitch Solutions regarded this as an indication of the effect of cooling domestic demand.

Meanwhile, property prices are estimated to stabilise with the average MoM new home price gains moderating to 0.8% MoM in December 2018.

“Since the Chinese authorities signalled that it will be implementing housing policy on a city-by-city basis during the annual Central Economic Work Conference, local governments in several cities such as Heze in Shandong Province), Zhuhai and Guangzhou in Guangdong Province have already eased housing restrictions,” Fitch Solutions revealed. “This could signal further loosening in certain areas at a time when the economy is slowing. Alongside lower mortgage rates by banks for first-time buyers, home sales are likely to be supported.”