China: Inflation to accelerate further in near-term – Goldman Sachs

Research Team at Goldman Sachs expects Chinese PPI inflation to accelerate further in the near term and CPI inflation to reach 2.5%.

Key Quotes

“Thus far, the big change has been a sharp turn in producer price inflation, which in turn has been driven by renminbi depreciation and by a rebound in global commodity prices (with selected Chinese commodity prices boosted by policies to improve pricing power for key upstream industries, particularly production restrictions).”

“Down the road, however, we see the possibility of a broader turn in inflation pressures if policymakers insist on keeping growth in the mid-6% range in an environment of falling potential growth.  Whereas historically the growth target could be thought of as an “out of the money put”, it is now a more binding constraint on policy, and has required substantial stimulus to achieve.”

“We expect interbank repo rates to remain fairly volatile in the near term, given growth has been broadly stable and policymakers have refocused on managing the leverage situation (not only in the real economy but also within the financial system). Rates are likely to ease materially only if either non-banks’ leverage in the interbank market moderates and/or economic growth slows significantly (which we anticipate for Q1 ’17), in our view. Should inflation surprise on the upside, however, upward pressure on rates may persist for even longer.”