Despite the fact that U.S consumer prices rose to a nearly four-decade high in December, some indicators of Chinese inflation rose at a slower-than-expected pace.
The data is expected to be the result of the divergent monetary policy between the two countries; China is seen to be getting ready to cushion its slowing economy by easing its monetary policy, while the Federal Reserve appears to be getting ready to raise interest rates.
This situation has encouraged investors looking for a bargain to take a closer look at Chinese equities, with the iShares MSCI China exchange-traded fund (Ticker: MCHI) up 3.4% so far this year. Amidst this excitement, Investors are still warned to be cautious mostly because Chinese authorities might exercise more restraint in their easing and therefore disappoint those with high expectations.
Both countries have been battling with rising inflationary pressures. In China, the pressure has been primarily concentrated in the industrial commodities-to-manufacturing-and-property arena, plus a bit in food, said Leland Miller, Chief executive of China Beige Book. “Inflation more broadly has looked far less worrisome in China Beige Book gauges than public data,” Miller said.
The public data released recently seems to suggest an ease in inflation pressures as China’s producer price index rose 10.3% slower than many economists had expected and slower than in November. Factory- gate inflation also rose at a slower than expected pace.
Both the PPI and Factory gate inflation were helped by Chinese authorities easing some restrictions on coal production, a move connected to the country’s commitment to its climate goals that inevitably led to a rise in raw material prices. Consumer prices were also lower, ostensibly owing to the weaker household demand and the slump in pork and fuel prices as Omicron hit consumer confidence, asserts TS Lombard Senior China economist Rory Green.
The sluggish growth combined with falling price pressures gives the People’s Bank of China more room to go a different route from the Fed and ease by cutting the amount a bank needs to hold on reserve and policy rate cuts in the months to come.
“China’s monetary easing will continue from here with growth and price backdrop conducive to a looser stance over at least the next nine months. The PBOC is a dove in a hawkish world,” Green says. With all this positivity in the air, it must not be forgotten that Omicron still poses a risk and could create huge drawbacks as Beijing’s strict policies to contain the virus lead to lockdowns and congestion at ports, thus worsening already severe shortages and potentially adding to inflationary pressures that show up in China’s exports.
China Beige Book’s analysts remain sceptical that decisive or meaningful stimulus lies ahead for investors. While Chinese authorities have taken significant steps toward easing monetary policy, and the officials are attempting to stabilize the economy ahead of the 20th Party Congress in the fall. President Xi Jinping is expected to take a third term; investors may consider lowering their stimulus expectations.
“With President Xi preparing to be coronated for life in the fall, political considerations require better sentiment. So yes, we will see some easing,” according to Miller. “Yet early signs are that policy easing will be a temporary political reprieve, not a sustained new economic approach.”