China's economic risks build as Delta variant spreads, prices rise

Goldman, JPMorgan cut GDP growth forecasts amid virus cases

China’s economic risks are building in the second half of the year, with growth set to slow while inflation pressures are picking up, clouding the outlook for central bank support.
 
A report on Monday showed factory-gate inflation surging again to 9 per cent in July as commodity prices climbed, while core consumer prices — which strip out volatile food and fuel costs — rose the most in 18 months.
 
At the same time, the spread of the delta variant is threatening China’s outlook, with Goldman Sachs Group Inc and JPMorgan Chase & Co downgrading growth forecasts for the third quarter and full year, and predicting more central bank easing.
 
The latest developments are another complication for policy makers, who have already pledged fiscal and monetary support for the economy in the second half of the year. While some economists see inflation risks limiting the room for central bank action, many view the uncertain growth environment as a bigger worry, with more easing likely to come.
 
“As the outbreak unfolds, China’s domestic demand will weaken, and the overall inflation pressure will decline,” said Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group “Even though prices are still high, they won’t have much momentum to rise further, so it won’t create a huge constraint on monetary policy.” Chinese government bonds extended losses after the data, with the yield on the 10-year security rising 4 basis points, the most since January, to 2.85 per cent.
 
The jump in factory-gate inflation was largely due to higher commodity prices, in particular oil and coal. Beijing has been trying to quell the surge in commodity prices by releasing inventory from the nation’s strategic reserves, cracking down on hoarding and speculation, and ordering state-owned enterprises to limit their exposure to overseas commodities markets.

Core CPI rose 1.3 per cent in July from a year ago, suggesting domestic demand is getting stronger.
 
Food prices declined 3.7 per cent from a year ago, mainly due to a 43.5 per cent plunge in pork prices, a key item in the CPI basket. “PPI will probably be around 6 per cent by the year-end. This will to some extent limit the room for monetary easing,” said Zhou Hao, senior emerging markets economist at Commerzbank AG in Singapore. “The possibility of a rate cut is extremely small.”
 
Latest trade data also showed an easing in global demand, another headwind for China’s growth. Export growth slowed to 19.3 per cent in July, missing forecasts, the customs administration said Saturday. Extreme weather conditions and local Covid outbreaks have disrupted production and shipping in parts of China, while record-high freight costs have squeezed exporters’ profits.
 
JPMorgan sees GDP growth now at 6.7 per cent year-on-year in the third quarter, down from 7.4 per cent previously, and 8.9 per cent expansion for the full year versus 9.1 per cent earlier. Goldman downgraded its 2021 forecast to 8.3 per cent from 8.6 per cent, while Nomura Holdings Inc. lowered theirs last week to 8.2 per cent.
 
The government’s target is for GDP growth of more than 6 per cent this year.