China inflation muted, paving way for further policy stimulus

Noticeably, CPI readings are subdued for the past few months. This could be another signal for more monetary policy easing for policymakers. We have already seen China’s credit impulse ticking up, and China’s central bank reinforced in the recent Monetary Policy Report that policy easing will likely be more proactive and flexible going forward to spur credit growth. We believe this is going to primarily support SMEs.

On the other hand, the strong momentum in PPI growth drove the PPI-CPI differential up to 12% at the end of October last year, mainly due to the rise in coal price; the power outages led to production cuts which pushed up prices of energy-intensive products. Since late last year, PPI is coming down as manufacturers’ pressure eased and global supply shortage is gradually recovering.

Looking ahead, we expect modest growth in CPI in 2022 and further reduction in manufacturing prices. This significantly contrasts with the high-inflation environment that a lot of developed markets are grappling with, and the respective monetary policies are going opposite directions between China and the DMs.

Investors are encouraged to consider geographical diversification given the dichotomy of economic cycles in China and the developed markets. As China re-focuses on growth this year, we favour the consumer discretionary sector, which includes apparel and luxury goods. In particular, domestic brands are gaining traction among Chinese millennials. For instance, local sports apparel brands like Li Ning and Anta are gaining an increasing proportion of market share over the likes of Nike and Adidas, with the Winter Olympics providing an additional uplift in consumer sentiment towards home grown.

We expect there is further room to grow.

Source: Bloomberg as at 17 February 2022