TS Lombard with the note:
- The end of coal shortages and the property slump mean that PPI is topping out, while Covid zero tolerance is capping CPI gains.
- Covid capex could create excess supply and export price disinflation.
- Benign domestic inflation backdrop allows the PBoC to continue easing; a 50bps RRR reduction and targeted rate cuts are likely in next six months.
In the second note in our adaptations series, we examine China, the prime beneficiary of Covid related goods consumption and the sole remaining “zero tolerance” hold-out. In 2021 China experienced “biflation” in the form of soaring industrial prices and anaemic CPI gains. Goods demand (domestic and foreign) is likely to fall next year, bringing down PPI and weighing on export prices. Zero tolerance, however, will persist and do much to cap a rise in consumer prices (ex. food). The combination of falling goods spending and Covid containment should provide, together with property-sector weakness, the macroeconomic conditions for the PBoC to remain a dove among hawks (today’s LPR cut is another step on Beijing’s easing cycle), for Chinese export prices to weaken and for PPI to turn negative in H2/22.
