Despite having no inflationary pressure in non-food items owing to massive overcapacity, one can’t say the same thing for food prices in China.
Food prices in China are volatile, and they are the main drivers for the overall headline inflation for most of the time. In August’s CPI data, vegetables prices have increased very sharply on bad weather. But for months now, we have pointed to the possibility of an increase in meat prices, in part due to the drought in US, pushing up prices of commodities like corn.
While it still seems to us unlikely that pork prices alone can drive the full-year CPI inflation above the full-year target of 4% with only 4 months left for the year, which could kill off any prospect of monetary easing, the rise of pork prices in the coming months is certain now. Standard Chartered writes:
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We are more concerned about the recent landing and imminent take-off of the pig cycle. Pork is the largest single component in the food part of the CPI basket, accounting for 9.4%, followed by grain (about 8.7%). Pork prices rose by 1% m/m in August, but this was the first rise since October 2011 (pork prices fell by an aggregate of 23% from October 2011 to July 2012). We believe the downtrend in pork prices is over. The pig-to-feedstuff ratio, at 5.7 in August (Figure 6), is now in loss-making territory (the key level is 6.0), meaning that farmers will now be exiting the sector. These things take a while to feed through, but we suspect that strong pork price increases are now being roasted into CPI for Q2-2013.
I have suggested for quite a while now that the central government is reluctant to embark on large scale stimulus, and a pick-up of inflation at this moment is unfortunate. With the ECB and Fed both easing, there is even less justification for China to ease monetary policy, and quite possibly China does not need to ease for the time being because ECB and Fed are helping.
In another note, Standard Chartered cut China’s GDP growth forecast for 2012 from 8.1% to 7.7%, and from 8.7% to 7.8% for 2013, while at the same time believe that PBOC will not cut rates, and the next move in rates will be up, while expecting only one more cut in RRR for 2012 as CPI inflation could move towards 5% yoy in 2013:
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In 2013, CPI inflation will be driven by the pig cycle (prices are now rising), easy money in the US and Europe, and utility price reform… We think it will breach 5% y/y in H2-2012 and that this will trigger a new round of hikes from the PBoC
[W]e no longer look for another cut in 2012. Indeed, we believe that the next move will be up, in late 2013, as official CPI inflation pushes above 5% y/y. After one hike in Q4-2013, we look for four more hikes in 2014… we now look for only one more RRR cut in 2012 (versus three cuts previously)… we expect no RRR cuts in 2013…
