Transportation fuel prices rose 24.1% in China in March 2022 from last year, the largest increase within the country’s CPI.
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BEIJING – China’s persistent inflation is narrowing the window for time People’s Bank of China It could lower interest rates and support growth, economists said.
Official measures of producer and consumer prices in China rose in March more than analysts had expected, according to data released on Monday.
“Rising food and energy price inflation limits the scope for the People’s Bank of China to cut interest rates, despite the rapidly deteriorating economy,” Nomura’s chief China economist Ting Lu and team said in a note on Monday.
Lu referred to his team’s report earlier this month that China’s one-year deposit rate is only slightly higher than the rate of consumer price increases. This reduces the relative value of Chinese bank deposits.
Internationally, higher US interest rates narrow the gap between the US benchmark 10-year treasury bond yield and its Chinese counterpart, reducing the relative attractiveness of Chinese bonds. China’s reduction rates would narrow this gap further.
The yield on Chinese 10-year government bonds fell below that of the United States for the first time in 12 years on Monday, according to Reuters. Previously, Chinese bond yields tended to trade at a premium of 100 to 200 basis points in the US
“We believe that April may be the last chance for China to cut interest rates in the near term by [the] The potential balance sheet for the Fed is shrinking,” said Bruce Pang, head of macro and strategy research at China Renaissance.
The minutes of the Federal Reserve’s meeting released last week showed how policy makers generally agreed Reducing the central bank’s holdings of bondslikely to start in May, at about double the pre-epidemic rate. US consumer price data Overnight.
“High inflation, if [it] Ongoing, it may limit China’s room for political maneuvering.”
He noted how Chinese investors are increasingly expecting the People’s Bank of China (PBOC) to act following high-level government comments this month.
Premier Li Keqiang said at a meeting last week of the State Council, the top executive body, that China would adjust monetary policy “as appropriate” to support growth.
The producer price index rose 8.3% in March, slower than the 8.8% increase in February and the lowest since April 2021, according to Wind data. Coal and petroleum products contributed some of the biggest gains.
Within the CPI, the largest increase was in transportation fuels, at 24.1% YoY in March. Global oil prices have risen since the outbreak of the Russo-Ukrainian war in late February.
Wind data showed China’s CPI rose 1.5% in March, up from 0.9% in February, the fastest since CPI rose at the same pace in December. The sharp drop in pork prices of 41.4% year-on-year continued to dampen food inflation. Vegetable prices increased by 17.2%.
“Inflation dynamics in China mean that margin pressure on Chinese companies continues,” said Bruce Liu, CEO of Esoterica Capital, a Beijing-based asset manager.
“Inflation in March was not the only force,” he said Chinese stock markets fell [on Monday]And The massive selling of stocks caused by the high real yield last Friday extended in the US,” said Liu.More COVID concerns in multiple places outside Shanghai (Guangzhou, Beijing, etc.) has also affected market sentiment, and investors have fully occupied their hands for the time being.”
The US 10-year Treasury yield surged to a three-year high on Friday and rose further overnight on Monday to 2.793%, the highest level since January 2019. The Chinese 10-year government bond yield was flat at around 2.8075% on Tuesday, according to the information Wind Information.
Citi analysts expect the People’s Bank of China (PBOC), as soon as this month, to at least lower the policy rate or reserve requirement ratio – a measure of how much cash banks need on hand. They said a prolonged Omicron wave requires more monetary easing.
“Inflation will not constrain monetary policy for now, in our view, but it could become a concern in the second half,” analysts said.
They expect the PPI to moderate due to last year’s high base – versus an annual increase of 5.6% – while the CPI is likely to rise slightly – rising 2.3% for this year – as food prices continue to rise.
CNBC’s Chris Hayes contributed to this report.
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