JPMorgan Econ FI-China June CPI inflation eased modestly to 0.2oya; general ...-109131570

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Asia Pacific Economic Research

10 July 2024

JPMORGAN

www.jpmorganmarkets.com

Emerging Markets Asia, Economic

and Policy Research

Grace Ng

(852) 2800-7002

grace.h.ng@jpmorgan.com

Haibin Zhu

(852) 2800-7039

haibin.zhu@jpmorgan.com

Tingting Ge

(852) 2800-0143

tingting.ge@jpmorgan.com

Ji Yan

(852) 2800-7673

ji.yan@jpmorgan.com

JPMorgan Chase Bank, N.A., Hong Kong Branch

•China’s June CPI inflation rate eased modestly to 0.2%over-year-ago (0.0%

m/m sa). The overall pricing environment remains rather weak: taking the first

six months together, headline CPI inflation has averaged 0.1%oya. Core CPI

inflation also remained soft, rising 0.6%oya in June (or 0.0% m/m sa).

•Food prices rose 0.7% m/m sa in June (or down 2.1%oya), with rising pork

prices (+11.4%m/m nsa), along with decline in fruit prices (-3.7% m/m nsa)

and vegetable prices (-7.3% m/m nsa). Regarding energy prices, vehicle fuel

prices fell 2.0% m/m sa in June.

•Overall, regarding major factors driving recent CPI trends, food prices appear

to be stabilizing (with recent uptick in pork prices), energy prices have moved

along with global commodity prices, with volatility in travel and transport

costs along with holiday seasons. Aside from these factors, general pricing

power for goods and services seems to have remained soft amid sluggish

domestic demand growth and weak private sector confidence.

•PPI deflation eased modestly in June, as headline PPI fell 0.8%oya (vs. -

1.4%oya in May). In sequential terms, PPI edged up 0.1% m/m sa in June.

Details suggest mixed trends in prices of industrial metals and energy-related

PPI, while PPI for auto/NEV continued to fall.

•Overall, we expect the low inflation environment to stay through 2H24. Steady

outlook on global commodity prices and moderate recovery in domestic pork

prices, along with low-base effect from last year, would help to avoid the return

of CPI deflation in 2H24. Meanwhile, demand-supply imbalance and excess

capacity concerns remain significant.

•Our forecast for full-year 2024 CPI inflation stands at 0.4%. Together with

prolonged (though moderating) PPI deflation, the GDP deflator will likely stay

in deflation zone through 2Q-3Q.

•On monetary policy, the central bank’s multiple-objective policy mandate has

led to measured policy responses and slow policy moves. Our forecasts look for

one 10bp policy rate cut and another 25bp RRR cut in 2H (both in 3Q), but TSF

growth will slowdown to 8.5% this year, with bank loan growth slowing to 9%.

China’s CPI inflation remained soft in June, as headline CPI rose 0.2%oya (J.P.

Morgan: 0.3%; consensus: 0.4%), compared to 0.3%oya in May. In sequential

terms, headline CPI stayed flat (0.0% m/m sa) in June, following the rise of 0.1%

m/m sa in May, or rising 0.9% 3m/3m saar. Besides, core CPI rose 0.6%oya in June

(vs. 0.6%oya in May. In sequential terms, core CPI stayed flat (0.0% m/m s) in June

(vs. -0.1% m/m sa in May), or up 0.2% 3m/3m saar.

Further breakdown of June CPI shows a moderate sequential uptick in food prices,

along with modest easing in energy prices. In particular, food prices fell 2.1%oya

in June (vs. -2.0%oya in May), or up 0.7% m/m sa (vs. +1.1% m/m sa in May).

See page 8 for analyst certification and important disclosures.

China

June CPI inflation eased modestly to 0.2%oya; general

pricing power weakness will not easily go away

Grace Ng (852) 2800-7002

grace.h.ng@jpmorgan.com

JPMorgan Chase Bank, N.A., Hong Kong Branch

Haibin Zhu (852) 2800-7039

haibin.zhu@jpmorgan.com

Tingting Ge (852) 2800-0143

tingting.ge@jpmorgan.com

Ji Yan (852) 2800-7673

ji.yan@jpmorgan.com

Asia Pacific Economic Research

China

10 July 2024

JPMORGAN

Besides, non-food CPI rose 0.8%oya in June (unchanged from 0.8%oya in May), and staying

flat in %m/m sa terms. Regarding energy prices, vehicle fuel prices fell 2.0% m/m nsa in June

(vs. -0.8%m/m nsa in May), reflecting recent global oil price trend. In addition, service prices

rose 0.7%oya in June (vs. 0.8%oya in May).

Meanwhile, PPI deflation eased modestly in June, as PPI fell 0.8%oya (J.P. Morgan: -1.0%;

consensus: -0.8%), compared to -1.4%oya in May. In sequential terms, PPI edged up 0.1%

m/m sa in June (vs. +0.1% m/m sa in May). In further breakdown, producer goods PPI fell

0.8%oya in June (vs. -1.6%oya in May), and consumer goods PPI fell 0.8%oya (unchanged

from -0.8%oya in May).

June CPI data still suggests general softness in consumer price

trend

Following the notable LNY-related volatility in CPI prints during 1Q, 2Q CPI reports

generally reflect softness in consumer price trends. In further details of the June CPI report,

prices for major food categories showed rather mixed trends: while pork prices rose 11.4%

m/m nsa in June (or up 18.1%oya), fruit prices fell 3.8% m/m nsa (or down 8.7%oya) and

vegetable prices fell 7.3% m/m nsa (or down 7.3%oya). As domestic travel picked up towards

the summer holiday period, the NBS noted easing in prices of air tickets (+2.5% m/m nsa in

June) and vehicle rental costs (+6.4% m/m nsa).

Further breakdown of the CPI basket shows general softness across various CPI items. Prices

of traffic and communication appliances and services fell 0.3% m/m sa in June, reflecting the

moderate decline in fuel costs, along with a further decline in auto prices. Besides, the CPI

component for household facilities and articles fell 0.1% m/m sa, and prices of clothing

stayed flat (0.0% m/m sa). Meanwhile, prices of recreational, educational and cultural

services edged up 0.1% m/m sa, reflecting modest pickup in domestic travel. Regarding other

major CPI categories, prices of medicine and medical care edged up 0.1% m/m sa, while

residence costs also edged up 0.1% m/m sa.

PPI deflation pressure eased modestly, with mixed trends in

prices of industrial metals

PPI stayed in deflationary territory for the 21st consecutive month in June, falling 0.8%oya

(vs. -1.4%oya in May). Meanwhile, in sequential terms, PPI seems to have stabilized

somewhat lately, as overall PPI edged up 0.1% m/m sa in June, following the uptick of 0.2%

m/m sa in May. Details in the June PPI data reflects mixed trends in prices of industrial metals

and energy-related PPI, while PPI for auto/NEV continued to fall.

Regarding the latest trend in input costs, the June PPI report reflects: 1) somewhat mixed

trend in energy-related PPI, as PPI for petroleum and natural gas mining fell 2.9%m/m nsa

in June, while PPI for coal mining and processing rose 1.1% m/m nsa; 2) regarding upstream

industrial materials prices (partly reflecting domestic industrial demand conditions), PPI for

ferrous metal (including steel) processing fell 0.6% m/m nsa in June, while PPI for non-

ferrous metal processing (including copper) rose 1.6% m/m nsa; 3) regarding the

construction sector, PPI for cement production rose 3.3% m/m nsa in June; 4) regarding the

auto sector, PPI for overall auto production fell 0.7% m/m nsa in June, while PPI for NEV

production fell 0.1% m/m nsa; 5) regarding downstream consumer sectors, PPI for consumer

goods fell 0.1% m/m nsa in June (falling 0.8%oya).

Low inflation environment to continue in 2024

Regarding the underlying trend in CPI inflation, headline CPI rose marginally by 0.1%oya

in the first six months of 2024,while core CPI showed a modest increase of 0.7%oya. On the

Grace Ng (852) 2800-7002

grace.h.ng@jpmorgan.com

JPMorgan Chase Bank, N.A., Hong Kong Branch

Haibin Zhu (852) 2800-7039

haibin.zhu@jpmorgan.com

Tingting Ge (852) 2800-0143

tingting.ge@jpmorgan.com

Ji Yan (852) 2800-7673

ji.yan@jpmorgan.com

Asia Pacific Economic Research

10 July 2024

JPMORGAN

positive side, following four consecutive months of annual CPI deflation through January

this year, headline CPI inflation has returned to modest positive zone since February. While

PPI remained stuck in deflation in over-year-ago terms (falling by average 2.1%oya in the

first six months), in level terms, PPI began to turn up modestly in May (+0.2% m/m sa) and

June (+0.1% m/m sa), with the pace of annual deflation easing to 0.8%oya in June.

We maintain the view that CPI deflation will not return in 2H24, but low inflation will

continue this year. The end of CPI deflation will be driven by: (1) the global commodity price

trend, as our global commodity team expects Brent oil price to stabilize towards an average

of $85 bbl through 2H24; (2) domestic pork prices gradually stabilize and recover – as

mentioned above, pork prices have picked up lately, rising 18.1%oya in June; and (3) the

low-base effect kicking in (CPI inflation softened notably from 2Q23 onwards).

Meanwhile, in the broader picture, the general weakness in pricing power for goods and

services reflects the soft momentum in domestic demand (consumer spending and private

investment), ongoing weakness in domestic confidence (across households and the corporate

sector), and the drag from the property market downturn, all of which will unlikely to change

materially in the near term. In particular, amid lingering housing market softness, weakness

in house prices and rental costs continue to drag overall CPI – note that the rental cost

component of the CPI basket remains soft, averaging 0.0%oya in the first six months. In

addition, consumer confidence remains generally soft amid lingering concerns of job/income

uncertainty, dragging domestic demand and general pricing conditions for consumer goods

and services. In all, the demand-supply imbalance and excess capacity concerns remain

notable.

Overall, our forecast for full-year 2024 CPI inflation stands at a modest 0.4%. Together with

prolonged PPI deflation (though the deflation pressure appears to have eased somewhat

lately), the GDP deflator may continue to stay in deflationary zone. The GDP deflator has

stayed in negative territory for four consecutive quarters through 1Q24, and will likely

remain in deflation zone in 2Q-3Q. Our full-year 2024 nominal GDP growth forecast is a soft

4.7%.

Monetary policy outlook

Regarding monetary policy and credit conditions, there have been growing concerns that

money supply growth and credit growth (both TSF growth and bank loan growth) have

continued to move lower to new historical lows in recent months (e.g. M1 growth at -4.2%,

M2 growth at 7.0%, and bank loan growth at 9.3% in May, and TSF growth at 8.3% in April).

Meanwhile, amid subdued CPI inflation and lingering PPI deflation, real interest rates in

China are higher than historical average levels: in particular, real average bank lending rate

(adjusted by GDP deflator) has hovered around 5%.

Meanwhile, central bank officials have stated that China’s monetary policy decision needs

to balance between near-term and long-term policy considerations, balance between growth

and risk prevention (financial stability),and balance between domestic and external policy

consideration (link). The multiple-objective policy mandate has led to measured policy

responses and slow policy moves. Our forecasts look for one 10bp policy rate cut and another

25bp RRR cut in 2H (both in 3Q), but TSF growth will slow down to 8.5% (vs. 9.5% last year)

and bank loan growth will slow down to 9% this year (vs. 10.6% last year).

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AsiaPacificEconomicResearch10July2024JPMORGANwww.jpmorganmarkets.comEmergingMarketsAsia,EconomicandPolicyResearchGraceNg(852)2800-7002grace.h.ng@jpmorgan.comHaibinZhu(852)2800-7039haibin.zhu@jpmorgan.comTingtingGe(852)2800-0143tingting.ge@jpmorgan.comJiYan(852)2800-7673ji.yan@jpmorgan.comJPMorganCha...

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