MNI: Energy Price Jump To Restrain, Not End PBOC Easing Bias

Rising inflation resulting from higher energy prices will constrain the pace of monetary easing by the People's Bank of China, but not change its moderately accommodative stance as it tackles weak domestic demand, policy advisors and economists told MNI.

CPI inflation may temporarily exceed the 2% target in some months later this year, though so long as it does not rise above 3% this should be acceptable as a moderate level given the country’s growth rate, said Lian Ping, director of the China Chief Economist Forum.

The central bank will retain its "appropriately accommodative policy,” particularly if the U.S. and Iran reach a lasting agreement following their two-week cease fire, allowing oil prices to remain below USD100 a barrel, Lian said.

Persistent deflationary pressures in recent years have also increased the central bank’s tolerance for higher inflation, he added, even if a pickup in prices is likely to make it more cautious about further easing. The need for reductions in banks’ reserve requirement ratios is also diminishing, as growth in deposits outpaces that in loans, keeping financial system liquidity at ample levels, though he noted that this could change in the case of a sustained rise in the stock market, which would divert savings into equities. (See MNI PBOC WATCH: Targeted Easing In Focus, Rate Cuts Delayed）

The Middle East crisis has prompted a divide among Chinese market players between those who expect the PBOC to react hawkishly, as it did in the face of a rise producer inflation in particular in 2016 and 2017, and those who anticipate that it will respond as it did in 2021, when it retained its easing bias in the face of Covid price pressures.

Zhao Xijun, co-dean of the China Capital Market Research Institute at Renmin University, told MNI that he believes the current situation to better resemble 2021, when imported inflationary pressure emerged against a backdrop of insufficient domestic demand, in contrast to the situation four or five years earlier when inflation was mainly home grown.

A rise in inflation would even be in line with the central bank's goal of promoting a reasonable pace of increase in prices, Zhao said, so long as it not excessive or overly persistent. For the moment, the probability that CPI exceeds 3% this year appears low, and domestic demand still requires further support from policy, despite a better-than-expected economic performance in the first two months of the year, led by strong exports and infrastructure investment, he said. 

Zhao argued that one or two quarters of data will be required to assess whether Q1’s performance is sustainable.

STAGFLATION DEBATE

Some market players have even mentioned the risk that China may face stagflation.

Wang Zhe, a senior economist at Caixin Insight Group, noted that the Manufacturing Purchasing Managers' Index issued by the National Bureau of Statistics showed significant jumps in both input and output prices in March, driven by rising energy and chemical product prices, with cost-side price growth outpacing sales-side growth, eroding corporate profitability.

The improvement in demand in March’s PMI was partly due to the late timing of this year’s Spring Festival, Wang said, while a surge in new export orders boosted headline numbers despite weak domestic demand. Additionally, employment remains in a prolonged slump, and business confidence is low, he said, calling for policies to increase household income and bolster the domestic market. (See MNI: China's Decades-Low GDP Target Fits Econ Slowdown Trend )

Lian, however, dismissed stagflation fears for the coming years. GDP growth in 2026 is likely to be in the upper end of the newly-reduced 4.5-5% target range, and China’s continually-upgrading export sector will continue to drive growth, he said, pointing to a boost to demand for new energy products and electric vehicles in the wake of the Iran conflict.

Growth in infrastructure investment is expected to exceed 3% y/y thanks to big projects in the 15th five-year plan and injections of official funds, after decreasing 2.2% last year, Lian noted.