China inflation makes it harder for PBOC to cut interest rates US Fed
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The largest rise in China’s consumer price index was the 24.1% increase in transportation fuel prices in March 2022, which is 24.1% more than a year earlier.
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BEIJING — Persistent inflation in China narrows the window for when the People’s Bank of ChinaAccording to economists, they could reduce interest rates and stimulate growth.
Data released Monday showed that official indicators of consumer and producer prices in China increased in March more than anticipated by analysts, according to data.
Ting Lu (Nomura’s China chief economist) and a group stated Monday that rising food and energy prices inflation limit the PBoC’s ability to lower interest rates despite the fast-deteriorating economy.
Lu refers to the earlier month report by his team that showed how China’s benchmark deposit rate for 1-year is just slightly lower than the rate at which consumer prices rises. This reduces Chinese bank deposits’ relative value.
Internationally, higher U.S. rates of interest narrow the gap to the U.S. benchmark. 10-year Treasury yieldChinese counterparts, which would reduce the relative value of Chinese bonds. Further reducing China’s interest rates would decrease this gap.
According to Reuters, the yield of China’s 10-year bond was below the U.S. Monday for the first-time in twelve years. In the past, the Chinese bond yield was traded at a premium of between 100 and 200 basis points over the U.S.
We believe that April may be China’s last chance to get a rate reduction in the short term. [the]Fed’s potential shrinkage in balance sheets,” commented Bruce Pang from China Renaissance.
The minutes of the Fed’s meeting last week revealed that policymakers had generally reached an agreement to release their minutes reduce the central bank’s holdings of bondsThe pandemic is expected to begin in May and will likely continue for about twice the time. U.S. consumer price dataIt is expected to be out tomorrow.
“Rising inflation, [it]Continues, could further limit China’s space for policy maneuvers,” Pang stated.
He observed that Chinese investors have become more receptive to the PBOC acting after hearing high-ranking government statements this month.
China will support growth by adjusting monetary policy when necessary, Premier Li Keqiang stated at the State Council meeting last week.
Squeeze profit margin
According to Wind data, March’s producer price index grew by 8.3%. It was lower than February’s 8.8% gain and it is now the lowest point since April 2021. Some of the biggest gains were due to petroleum and coal products.
Transport fuel saw the biggest increase in consumer prices, rising by 24.1% over the past year in March. Since February’s Russia-Ukraine war, the global oil price has risen.
China’s Consumer Price Index rose 1.5% in March from 0.9% in February. It was the fastest increase since December 2012, when prices rose at the same rate, Wind Data showed. Food inflation continued to be slowed by a sharp 41.4% decline in pork prices year-on-year. The vegetable prices increased by 17.2%.
Bruce Liu of Esoterica Capital in Beijing, an asset manager, stated, “China’s Inflation Dynamics implied a continual margin pressure upon Chinese corporates.”
March inflation wasn’t the only factor that affected our economy brought down Chinese equity markets [on Monday], and the rising-real-yield-induced equity sell-off last Friday in the U.S. spilled over,” Liu said. “More Covid worries in multiple places outside Shanghai (Guangzhou, Beijing, etc.) Investors had to deal with a chaotic market, as did sentiment in the markets.
U.S. 10 year Treasury yields climbed to an all-time high of 3.07% Friday. They jumped further overnight to 2.793% Monday, their highest point since January 2019. Wind Information reports that China’s 10-year Treasury yield was at 2.8075% Tuesday.
Citi analysts expect the PBOC could, as soon as this month, cut at least a policy rate or the reserve requirement ratio — a measure of how much cash banks need to have on hand. According to them, the extended omicron wave calls for more monetary easing.
Analysts stated that inflation won’t restrict monetary policy right now but could cause more concern for H2 in the future.
They expect the producer price index to moderate due to last year’s high base — for a 5.6% annual increase — while the consumer price index will likely rise slightly — rising 2.3% for the year— as food prices remain elevated.
— CNBC’s Chris Hayes contributed to this report.
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