JPMorgan cut its outlook for China, becoming the latest bank to downgrade projections for the world’s second-largest economy amid signs of sputtering growth and the spread of the Delta variant.
For their part, Goldman sees Chinese GDP growth of 8.3% for the full-year, down from 8.6% previously. JPMorgan’s new outlook calls for growth of 8.9% from a prior forecast of 9.1%. The bank warned that Beijing’s move to tighten the screws on the private education industry could cost “millions” of jobs. JPMorgan also cautioned that containment measures tied to new virus outbreaks could stymie growth.
Consensus is building around the notion that more easing from the PBoC is a foregone conclusion, even as some analysts insist the odds of an actual policy rate cut are remote. The bank cut RRR last month.
JPMorgan projects two additional RRR cuts (in October and January) as well as a small cut to repo rates and the loan prime rate in Q4. LPR, the de facto benchmark, is priced off the medium-term lending rate. All rates other than RRR have been unchanged for more than a year (figure above).
But easing could be complicated by price pressures. Factory-gate inflation was hotter than anticipated in July, data out Monday showed. Economists expecting another sub-9% reading following June’s modest deceleration were disappointed. PPI jumped 9% YoY last month, matching the highest estimate (figure below).
Higher commodity prices (which authorities in Beijing are attempting to arrest) contributed. The PBoC described the situation as “most likely temporary,” while reiterating that the domestic economic recovery “is not yet solid.”
That, in turn, suggests monetary policy will err on the side of caution, especially considering the latest virus surge and the economic ramifications of Beijing’s famously draconian containment protocols.
Pass-through to consumer prices was limited. CPI rose just 1%, bringing the spread to another three-decade wide (figure below).
That said, core CPI rose 1.3%, the most in 18 months. If you’re an optimist, you might suggest that bodes well for domestic demand, which lagged factory output during China’s recovery last year and remains a source of consternation.
Over the weekend, trade data for July showed exports and imports slowing, even as both remained generally buoyant.
“China’s export growth likely reached its peak,” SocGen’s Michelle Lam and Wei Yao said Monday. “This reinforces our view that trade momentum will ease in the second half due to easing fiscal stimulus and the rotation to service spending upon reopening in major economies,” they went on to say, noting that “on the margin, this will add to the downward pressure on China’s growth in addition to slowing property investment and tepid consumption due to local outbreaks.”
Policymakers in Beijing are no strangers to delicate balancing acts. And, as noted above, it’s not likely the PBoC will prioritize inflation over growth if the overall outlook darkens. There are, after all, ways of preventing pass-through to consumer prices when you’re an authoritarian state.
