Headline inflation in China could surge higher by multiple percentage points into 2024.
“ China is merely in an inflation soft-patch from which it will quickly transition into a hotter environment. ”
There is a wall of worry about China. This is because of challenges in property markets, the shadow banking system and key export markets alongside an aging population, supply chain reshoring and high levels of general government debt that may limit flexibility alongside modest monetary stimulus to date.
A key missing ingredient to a deflation call is that consumer prices are not widely expected to continue falling. Consensus forecasts look for a return to 2% inflation next year. And inflation expectations are firm. The People’s Bank of China’s one-quarter-ahead urban depositors price-expectations index continues to indicate that only a small handful of consumers expect overall prices to decline. Ditto for house prices.
Chinese equity indices are about 15%-20% off their 2021 peaks, which is a correction from the overshooting gains of 2019-2020. The Shanghai Composite CN:SHCOMP index remains about 2% higher so far this year and has a price-earnings ratio of more than 14.0, while the Shenzhen Composite’s CN:399106 equivalent sits at about 35 times earnings and is flat year-to-date; neither of which can be fairly labelled as deflationary collapses.
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