Economic Update


Less Expansionary Monetary Policy Expected In the Mainland

After ending a streak of year-on-year (YoY) declines in September 2016 (see Chart 1), produce prices continued to pick up at an accelerated pace in December 2016 in the Mainland. Producer Price Index (PPI) jumped 5.5% YoY in December, compared to 3.3% in November and the 1.5% average over the past three months. During the period, prices of materials (e.g. steel, rubber, copper) all saw double-digit YoY increases (see Chart 2), explaining the notable up-swing of the PPI.

Meanwhile, consumer price increases were stable albeit a dip in the YoY growth. The Consumer Price Index (CPI) picked up 2.1% YoY in December, down from the 2.3% YoY increase in November but in line with the 2.1% average increase over the past three months (see Chart 1). The stabilisation was at least partly attributable to the warmer weather. According to the China Meteorological Administration, this past December was the warmest in history, 1which could be the reason why slower food price increases were observed in December (from 4% YoY in November to 2.4% YoY in December), leading to a lower CPI reading.


The PPI strength will likely continue in the winter in part because of seasonality and a low comparable base. On the other hand, if the warm weather continues, it will continue to dampen the food price-driven inflation.

While the pace of inflation remains acceptable and will unlikely lead to policy tightening, as suggested in our Economic Update released on 13 September, monetary policy could become less expansionary as signs of stabilised growth continue to flash.2

Indeed, for the first time over the past six years, the People’s Bank of China (PBoC) added “neutral” to describe its monetary policy stance in the communiqué of the central bank’s 4Q2016 monetary policy committee meeting.3 As we maintain our view that monetary policy in the Mainland will remain largely accommodative, some tightening measures (e.g. announcing a lower money supply and loan growth targets in the National People’s Congress, recommending state-owned banks become relatively more conservative in their lending practices) could be adopted to prevent “bubble risks.”4

Such a case may be strengthened as the market now foresees an 80% chance of the Fed bringing interest rates up by 0.25-0.75 percentage point by the end of 2017 (see Table 1). As policymakers do not seem to desire a depreciation of the RMB, we believe the PBoC could tighten the monetary policy gradually in order to provide stronger confidence in the currency.

1 It averaged 0.1 degree Celsius in the first 26 days, representing 3 C degrees higher than a regular year (see here)
2 The Meaning of an Established Stabilising Trend (13 September 2016)
3 PBoC (see here)
4 Outlook of the Chinese Economy (January 2017) The Bulletin


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