Antler Capital

Stanley Tsai, CFA

Macroeconomics

The divergence between China's May PPI and CPI was materially wider than expected. At 7.7%, the gap has reached a new high. Cost pressures on mid/downstream producers are mounting, although in our view, a good portion of that risk has been priced into equity valuations. Consumer prices will likely remain benign for the rest of the year, owing to subdued food prices and Beijing's tight grip on the supply chain (Exhibit 1).
The sharp bounce in PPI is reminiscent of what we saw in 2010 and 2017. But the external environment is vastly different from both monetary and geopolitical perspectives. In any case, we believe we are close to the peak in the cycle, if we are not already there.
Headline CPI was benign, putting concerns over tightening to rest for the time being. To be clear, inflation will gradually trickle down to the consumer, but the pace appears to be steady. At the current rate, we see CPI ending the year at the 2% level. We believe this scenario is supportive of a rotation into consumer cyclicals.
Overall, the new trade and inflation data reinforce our view that monetary policy will stay the course in 2H21. But we will probably see moderately tighter lending conditions through the summer and autumn. Slower credit growth may also weigh on construction activity, curbing further commodity rallies. 
With consumer prices in check, policymakers will remain focused on frothy property values. The key policy risk continues to shift to the long end of the lending curve, with marginal upward strain on the five-year loan prime rate on which mortgage pricing is based.
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<td style="width: 100%;">Exhibit 1: China | CPI &amp; PPI % Change y/y</td>
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Source: National Bureau of Statistics
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The divergence between China's May PPI and CPI was materially wider than expected. At 7.7%, the gap has reached a new high. Cost pressures on mid/downstream producers are mounting, although in our view, a good portion of that risk has been priced into equity valuations. Consumer prices will likely remain benign for the rest of the year, owing to subdued food prices and Beijing's tight grip on the supply chain (Exhibit 1).
The sharp bounce in PPI is reminiscent of what we saw in 2010 and 2017. But the external environment is vastly different from both monetary and geopolitical perspectives. In any case, we believe we are close to the peak in the cycle, if we are not already there.
Headline CPI was benign, putting concerns over tightening to rest for the time being. To be clear, inflation will gradually trickle down to the consumer, but the pace appears to be steady. At the current rate, we see CPI ending the year at the 2% level. We believe this scenario is supportive of a rotation into consumer cyclicals.
Overall, the new trade and inflation data reinforce our view that monetary policy will stay the course in 2H21. But we will probably see moderately tighter lending conditions through the summer and autumn. Slower credit growth may also weigh on construction activity, curbing further commodity rallies. 
With consumer prices in check, policymakers will remain focused on frothy property values. The key policy risk continues to shift to the long end of the lending curve, with marginal upward strain on the five-year loan prime rate on which mortgage pricing is based.



Exhibit 1: China | CPI &amp; PPI % Change y/y




Source: National Bureau of Statistics





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China Macro: PPI Peaks, While CPI Eases Tightening Fears