MORGAN STANLEY: There's One Reason Why The Bad Chinese Data Won't Trigger Immediate Stimulus

China Pork

Photo: Feng Li/Getty Images

The past two days have been riddled with disappointing headlines out of China.  Retail sales, residential investment, foreign direct investment, and exports have all reflected symptoms of a slowing economy.Furthermore, the headline inflation numbers have come in cool, which has experts thinking that the Chinese Central Bank will unleash monetary stimulus.

Not so fast, says Helen Qiao.

Qiao, Morgan Stanley’s top China economist, points to the components of inflation:

The recent rebound in food prices may keep the central bank from immediate monetary easing.
Despite the food supply shock from adverse weather conditions, we still believe the downward trend in CPI and PPI inflation remain intact, and the case for further interest rate cuts is strong. However, unless the recent rise in vegetable prices and soft commodity price surge in the international commodity market turn out to be short-lived or insignificant to China’s CPI inflation, the PBOC may see less room for monetary easing before CPI inflation is clearly heading south again.

Vegetable prices.

Thought not immediate, Qiao expects easing to come eventually.

The lower-than- expected activity growth in June-July tipped the risks on our annual GDP forecast to the downside. We still firmly believe the Chinese economy is running below its long- term potential growth level, and thus policy easing will likely step up to help stabilise growth and avoid social instability without worrying about inflationary pressures. As it draws close to the leadership transition, we see a greater probability of more effective delivery of policy easing measures in the next few months, when political uncertainties dissipate and headwinds from external demand likely strengthens.

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