3 price threats China must watch out for

Still very vulnerable to inflation risks.

According to Nomura, the People‟s Bank of China (PBoC) released its Q4 monetary policy report, in which it reiterated “stabilizing growth, rebalancing the economy, containing inflation, and controlling risks” as the top policy objectives – the same message it gave after its monetary policy committee meeting in December.

Note that “controlling risks” was not given as a top policy objective in the Q3 monetary policy report. Moreover, the Q3 report emphasized a “focus more on promoting growth”, while that sentence was removed from the Q4 report.

Here's more from Nomura:

The Q4 report emphasizes inflation risks, highlighting three factors that could put upward pressure on prices:

1) The labour force has shrunk, structurally pushing up production costs.

2) The supply curve has steepened, meaning prices are becoming more sensitive to demand shocks. PBoC research shows that, since the global financial crisis began, CPI inflation has become more sensitive to changes in the output gap.

3) Loose global monetary conditions have lead to imported inflation pressures. The report notes that in the PBoC‟s Q4 household survey, 41.7% of respondents expect inflation to rise, up from 37% in Q3.

Finance Minister Xie Xuren yesterday laid out a work plan for his ministry in 2013, in which he highlighted the need to strengthen local government debt management and reiterated the central government‟s ban on local governments providing guarantees to fund-raising activities.

He plans to set up a system to track overall local government debt in 2013.

The PBoC report and the MoF‟s stance (as reported by the official Xinhua news agency) reinforce our view that policymakers are increasingly concerned about financial and inflation risks, and that policy will shift from the loose stance taken in H2 2012.

The crackdown on trust issuance with local government guarantees is the first step and should lead to lower total social financing growth in H1 2013, and a GDP growth slowdown in H2.