Kick it into neutral
Shuang Ding, chief economist of Greater China and Northern Asia at Standard Chartered, thinks that even after accounting for a more inflationary China in 2018, the PBoC will resist hiking rates aggressively.
Despite predicting CPI inflation to average 2.7% next year, 0.5 percentage points (ppt) higher than the Bloomberg consensus of 2.2%, Ding and senior economist Wei Li believe the PBoC will maintain a “neutral monetary policy” due to a “slowing housing market, substantially tightened financial regulations and already-high market interest rates”.
But they mention that higher oil prices in 2018 pose an upside risk to their projection. Faster oil price growth could lead to higher inflationary expectations in the US, the duo say, which could lead to a more “intensive” Fed rate hiking cycle, higher capital repatriation to the US and a stronger dollar.
“Under this scenario, the PBoC may decide to hike interest rates to alleviate pressure on the CNY and stem capital outflows from China,” they add.
Commodities calamity
What if commodity prices go in the other direction? The reason the China slowdown of 2015 and 2016 was so painful and deep-rooted was because it coincided with the oil price tanking from $100 per barrel to $30. Could volatile commodity prices in 2018 provide the catalyst to destabilise the region again?
But 2017 is not 2015. Things are different now. OPEC’s members have agreed to extend production cuts further into 2018, removing fears of a supply glut; the oil price has recovered and has now pushed past $65 a barrel.
JP Morgan analysts predict there will be a loose cap on crude prices around $60 throughout 2018, despite slowing demand from China, the world’s largest importer of crude oil.
Maybe the global economy is capable of withstanding a China wobble at this unique period of harmonious growth. But maybe perma-bear Edwards’ caution is to some extent warranted.
If recent economic history has taught us anything it’s that in these quiet moments, we should keep on our toes and always expect the unexpected.
