Don’t say I didn’t warn you, from Macquarie:
The key takeaway from our recent China trips was that inflation concerns within China are clearly rising already, and policymakers are increasingly concerned with keeping inflation under control. PPI inflation turned positive in September for the first time in 54 months, mainly driven by higher price gains from the steel, base metal and coal industries. While CPI has remained more steady, standing at 2.1% last month and below the government target of 3%, the rise in PPI is expected to lead to a higher CPI next year as costs are passed through, and higher CPI could lead to a more prudent macro policy once it get close to 3%. Essentially, as we head into 2017 watching Chinese inflation rates will be an important factor for the first time since 2012, as acceleration has the potential to lead to more aggressive monetary tightening.
The government has also become increasingly concerned with runaway property prices this year. So far tightening measures have been largely seen on a city-by-city basis (i.e. fine tuning), with increasingly stringent tightening seen this week from some larger cities including Shanghai and Tianjin. More importantly in our view however is recent media reports that the CBRC has asked banks in these cities to review their mortgage lending. If property tightening is driven more broadly by the CBRC restraining mortgage lending, then we believe property market sales and potentially construction activity could slow more sharply than we currently expect for 2017.
