China: Inflation concerns seem overdone – Nomura

Analysts at Nomura suggest that so far, China’ consumer price index (CPI) inflation has been muted.

Key Quotes

“However, it has returned to radar screens recently because of floods in Shouguang (one of China’s biggest vegetable producing areas), the spread of African swine fever (ASF), rising rents in Beijing, RMB depreciation and escalating China-US trade tensions.”

“Markets appear concerned that rising inflation risks may constrain the room Beijing has for policy easing. While we believe markets need to be cautious with regards to ASF, inflation concerns in relation to other factors seem overdone.”

“In our view, increases in vegetable prices and rents due to supply and demand shocks are likely to be short-lived, overall inflation risks remain contained so far amid slowing GDP growth, and Beijing’s policy easing agenda is unlikely to be affected by inflation concerns.”

“That said, we do believe room for policy easing is limited by other factors. We forecast CPI inflation to rise mildly to 2.1% in 2018 (monthly average of year-on-year CPI inflation, a small revision from 2.0%) from 1.6% in 2017.”

“We believe CPI inflation could drop to around 2.0% y-o-y in September before rebounding to around 2.4% in December.”