China: High materials prices to decelerate - ING

Iris Pang, Economist at ING, explains that in China high materials prices are likely to decelerate because growth of construction from infrastructure will not match last year’s real estate growth.

Key Quotes

“Our forecast of CPI inflation is slightly higher than consensus (INGF: 1.8% YoY, consensus: 1.7%; prior: 1.4%). Food prices will continue to dominate the CPI trend. High egg prices were the primary factor in September as additional demand came from Asia to substitute eggs from Europe. Low base effects are another factor.”

“PPI inflation will edge lower, which differs from the consensus that expects slightly higher numbers than the previous month (INGF: 5.3%; consensus: 5.7%; prior: 5.5%). PPI inflation has stayed about 5% for 8 straight months as material prices have gone up. Our forecast is lower than consensus as we believe that PPI inflation has peaked.”

“Higher coal and steel prices are the results of overcapacity reduction reform that have reduced supply of these commodities. But demand will rise more slowly than before. Infrastructure investment will continue to replace slower housing construction activity in fixed asset investment. But growth in infrastructure will not be able to match the previous growth of real estate construction. Materials prices will continue to increase, however, they should not accelerate further unless there is extra demand for materials from the real estate sector, which we do not foresee.”

“The PBoC is making the most of this stable inflation environment to carry out financial deleveraging reforms. Higher interbank interest rates would be one of the outcomes of such reforms.”