The growth and inflation data released today shows that the PBOC was targeting asset prices, not consumer prices, with its interest rate increase. With that in mind, the data released today makes the PBOC’s warning shot to investors in residential real estate look a bit timid.
If controlling domestic inflation was a big worry, then the central bank should have raised rates in March and not have waited until October to do so. Remarks from PBOC monetary committee member Li Daokui published by Xinhua, that "worries about soaring prices overwhelmed fears about economic growth", appear to be simply out of step with the trends evident in the data. That is unless Mr. Li knows more than he is saying and is available to pedestrian economic analysts, and he almost certainly does (we hope).
This is the essential question: if growth is slowing down and controls on the growth to money and credit remain in place, why worry about inflation, or rising inflationary expectations?
The data released today by the NBS puts Q3 GDP growth at 9.6% y/y, slightly higher than expected, but consistent with the moderating trend and with policy intentions. The corresponding growth rate for the first 9-months of the year came in at 10.6%. China’s consumer price index (CPI) was up by 2.9% y/y for the third-quarter, with the corresponding rate for September up by 3.6% y/y.
If we were to look at the charts below outside of the context of the interest rate increase by the PBOC, it would look like an economy that is yes, running hot, but is past its cyclical peak. The slowdown to growth is the product of credit controls and administrative tightening measures that will remain in place, and the economy appears to be gliding towards a soft-landing. So what is all of the fuss about inflation? Asset price inflation and inflation in the real economy are different animals, and the former does not appear to be driving the latter based on the most recent data.
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At the risk of sounding redundant, there has been a lot of misguided alarm about inflation. If the economy is slowing down, inflation will probably peak soon, and non-food inflation already has. Expectations for the future are more important than the recent past, and if households are expecting a slowdown to growth (e.g. wage growth) and potential regulatory actions that will dent property prices, these expectations are probably pretty well anchored.
Non-food inflation has not increased in 5-months, and could actually fall. The reason is pretty obvious: if producers of consumer goods did not have much pricing power when the economy was really strong, they are going to have even less as the economy slows given levels of accumulated capacity.
On the supply side of the economy, one would expect to see moderating PPI measures as output and investment growth slows. New project starts by enterprises are down, inventory building is slowing, and overall it looks pretty clear that increases to rates of growth to producer prices are past the cyclical peak.
This leaves continuing increases to real estate prices as the counter-cyclical trend. Recent data on bank deposits does not indicate a major draw down and new loan growth figures look reasonably tame. Thinking back to the US housing bubble, which was fueled by non-monetary credit, or in other words financial innovation, is there a chance that backdoor financial innovation in China is one of the factors stoking residential property prices?
We don’t have an answer to that today, but it is something well worth looking into. With this and the charts above in mind, when the real estate cycle breaks, or more meaningful brakes are applied, it is reasonable to expect that moderating trends in non-food CPI and PPI will pick up.
Disclosure: No positions