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1、 November 2, 2009 China Economics Inflation Outlook in 2010: A Supply-side Perspective Whats new: We recently discussed Chinas inflation outlook in 2010 and concluded that concern about potentially high inflation in China in 2010 is unwarranted by examining aggregate demand-related factors such as m
2、oney supply and exports. In this note, we focus on the implications to inflation pressures stemming from potential supply shocks (e.g., international commodity and domestic food prices). Conclusion: From the supply-side perspective, our view about 2010 inflation outlook remains broadly unchanged. We
3、 use the results from supply-side analysis to test how robust the results from the model-based, demand-side analysis are to potential supply shocks. Assuming the cost pressures stemming from supply-side shocks are able to pass through the supply chain to be reflected in the corresponding price incre
4、ase of downstream products without much constraint from the demand side, we forecast a trajectory of CPI inflation for 2010 that is similar to the one derived from model-based, demand-side analysis. Policy implications: In view of this inflation outlook, we expect that the current policy stance shou
5、ld remain broadly unchanged toward year-end and turn neutral at the beginning of 2010 as the pace of new bank lending creation normalizes from about Rmb10tn in 2009 to Rmb7-8tn in 2010. Policy tightening in the form of RRR hike, base interest rate hike, or Renminbi appreciation is unlikely before mi
6、d-2010. If, however, excess liquidity stemming from large external balance of payment surpluses were to emerge earlier than expected, we would not rule out the possibility of the RRR hike cycle could start as early as beginning of 2Q10. Risks: If the global economic recovery in 2010 were to be much
7、stronger than expected, both Chinas export growth and the global commodity prices could surprise to the upside, likely resulting in stronger inflationary pressures and earlier policy tightening. Recent Reports Title Date Chartbook: Economic Recovery And BeyondOct 26, 2009 Recovery on Track, But Not
8、Overheating Oct 22, 2009 Worried About Inflation? Get Money Right First Oct 19, 2009 The Virtues of Over-savings: A Post-crisis Reflection on Chinese Economy Sep 27, 2009 Chartbook : The Recovery Gets UnexcitingSep 16, 2009 A Q and b) the classical hog cycle that will likely lead to an increase in p
9、ork and other meat prices in 2010. In particular, regarding the latter, pork prices have been sliding sharply from the peak since 1Q08 and have fallen below the break-even level (i.e., 6-to-1 pork-to-grain price ratio) in June. However, pork price has started to bottom out since July due to governme
10、nt intervention through frozen pork reserve program and some increase in production cost. According to our agricultural research team, the destocking of live hogs should extend to 4Q09 to complete supply adjustment, which could cause substantial pork price increases (e.g., mid teens) over the course
11、 of 2010. Exhibit 8 Food Price Inflation Forecasts 80 100 120 140 160 180 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 -5 0 5 10 15 20 25 Food CPI Level (Jan 01=100) Food CPI (%YoY, rhs) Forecast Source: C
12、EIC, Morgan Stanley Research food price inflation to average 7.0% in 2010, with a potential peak of 10%YoY in early 3Q10 Taking into account these factors, we forecast food price inflation to average 7.0% in 2010, with a potential peak of 10%YoY in early 3Q10. Under this forecast, the food prices ar
13、e envisaged to reach their previous peak level by end 1Q10 and continue to rise steadily thereafter (Exhibit 8). Combining the forecasts of non-food (2/3 of the basket) and food (1/3 of the basket) CPI inflation, we obtain the forecasts of the overall CPI inflation. Specifically, the average CPI inf
14、lation in 2010 will be about 3.0%. The inflation rate will turn positive in 4Q09 and start to rise rapidly to 1.8%YoY in 1Q10, reaching 3.6%YoY in 2Q10 and 3Q10 before moderating to 3.0%YoY in 4Q10. The peak of CPI inflation will likely be in July at 4.3%YoY. the average CPI inflation in 2010 will b
15、e about 3.0%.start to rise rapidly to 1.8%YoY in 1Q10, reaching 3.6%YoY in 2Q10 and 3Q10 before moderating to 3.0%YoY in 4Q10. The peak of CPI inflation will likely be in July at 4.3%YoY Exhibit 9 CPI Inflation Forecasts: A Supply-side Perspective 95 100 105 110 115 120 125 Jan-01 Jul-01 Jan-02 Jul-
16、02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 -4 -2 0 2 4 6 8 10 CPI Level (Jan 01=100) CPI (%YoY, rhs) Forecast Source: CEIC, Morgan Stanley Research A Robustness Test Regular reader of our reports would find that our inflation fo
17、recasts based on supply-side analysis in this report is not exactly the same as those from model-based, demand-side 迅嘉机构内参 - http:/ 6 M O R G A N S T A N L E Y R E S E A R C H November 2, 2009 China Economics analysis presented in another recent report on this subject (Exhibit 1 and 9) (see “China E
18、conomics: Worried About Inflation? Get Money Right First,” October 19). Reader may recall that in the earlier report, we wrote that “the average CPI inflation in 2010 will be about 2.5%. The inflation rate will turn positive in 4Q09 and start to rise rapidly to 2.4%YoY in 1Q10 and 2.6%YoY in 2Q10, a
19、s the lag effects of strong true M2 growth in 3Q09 and 4Q09 are only partly offset by continued weak exports. CPI inflation will likely peak in 3Q10 at about 2.8%YoY, as the pick-up in export growth since 2Q10 will add to inflationary pressures despite some moderation in M2 growth.” The difference i
20、n CPI forecasts between two approaches is to be expected. We, in fact, intend to use the results from supply-side analysis to test how robust the results from the model-based, demand-side analysis are to potential supply shocks. In particular, we assume the cost pressures stemming from supply-side s
21、hocks will be able to pass through the supply chain to be reflected in the corresponding price increase of downstream products without much constraint from the demand side. To the extent that weak demand constitutes headwinds for price increase or firms choose to absorb the cost pressures through lo
22、wer margin, the supply-side analysis tends to yield inflation forecasts with upward bias, in our view. .to the extent that weak demand constitutes headwinds for price increase or firms choose to absorb the cost pressures through lower margin, the supply-side analysis tends to yield inflation forecas
23、ts with upward bias In view of the similar-albeit not the same-forecasts, we think that our model-based, demand side analysis has passed the robustness test from the supply-side analysis. This is not entirely coincidental though. The international commodity prices are not completely exogenous to Chi
24、na, as strong demand from China influences has direct bearing on international commodes prices. Policy Implications In view of this inflation outlook, we expect that the current policy stance should remain broadly unchanged toward yearend and turn neutral at the beginning of 2010 as the pace of new
25、bank lending creation normalizes from about Rmb10tn in 2009 to Rmb7-8tn in 2010. Policy tightening in the form of RRR hike or Renminbi appreciation is unlikely before mid-2010, in our view. If, however, excess liquidity stemming from large external balance of payment surpluses were to emerge earlier
26、 than expected, we would not rule out the possibility of the RRR hike cycle could start as early as beginning of 2Q10. Indeed, with inflation pressures likely muted, the monetary policy priority in 2010 will likely be placed on liquidity management through RRR hikes. with inflation pressures likely
27、muted, the monetary policy priority in 2010 will likely be placed on liquidity management through RRR hikes We expect PBoC to hike the base interest rate early 3Q10 when CPI inflation expects to have exceeded 3.0%YoY. However, since the CPI inflation is forecasted to moderate in the 2H10, we expect
28、no more than two 27-bps rate hikes over 2H10, the primary purpose of which is to manage inflation expectations. In view of the current de facto peg of Renminbi against the USD, the timing of Chinas rate hike will also hinge on that of US Fed, in our view. In particular, we do not expect PBoC to hike
29、 interest rate before US Fed does. Incidentally, our MS US economics team expect US Fed to stay on hold until mid 2010 (see “US Economics: US Economic and Interest Rate Forecast: Recovery Arrives - But Not a V,” September 8, by Richard Berner and David Greenlaw). Where We Could Be Wrong If the globa
30、l economic recovery in 2010 were to be much stronger than expected, both Chinas export growth and the global commodity prices could surprise to the upside, likely resulting in stronger inflationary pressures and earlier policy tightening. If, however, we turn out to be wrong, it would suggest that b
31、oth global and Chinese economies would be in a much better shape than is currently envisaged under our baseline scenario. In the event of sudden jump in international commodities prices due to financial speculation without meaningful improvement in global economic fundamentals, we do not rule out th
32、e possibility that Chinese authorities may again resort to temporary administrative controls over upstream prices to prevent volatile financial shocks from disrupting the real economy, as was the case in 2007-08. 迅嘉机构内参 - http:/ 7 M O R G A N S T A N L E Y R E S E A R C H November 2, 2009 China Econ
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