SINGAPORE (Oct 25): The trade war between US and China has hogged headlines for the better part of the year. But amid all the new salvos of trade tariffs, China’s policymakers are to be mindful of another risk: Inflation, warns JP Morgan Asia Pacific’s vice chairman Jing Ulrich.

In China, a third of the consumer price index basket comprises of food. Pork is practically a staple. But bouts of swine flu have driven up pork prices. So has the trade war started by US president Donald Trump. Soybean – imported from US by Chinese pig farmers as feed – is in Beijing’s retaliatory tariff list. This hurts not only a key base of Trump voters, but also Chinese farmers and consumers.

“The joke is that CPI stands for consumers’ pork index,” quips Ulrich, in a recent interview with The Edge Singapore. Since May this year, China’s monthly inflation year-on-year growth rate has been creeping up. From 1.55% in May, the figure went up to 1.75% the following month, then 2.14% for July, 2.32% in August and for September, 2.4%.

To be sure this inflationary growth rate is still a far cry from the near double-digit range seen just over a decade ago when the entire country was in a binge mode to get ready for the 2008 Beijing Olympics.

In Feb 2008, inflation growth hit 8.8% y-o-y. This monthly rate stayed above 8% for two more months before easing slightly to 7.83% for May 2008. Fortunately, the global financial crisis brought things to a halt and by December 2008, y-o-y inflation rate had decelerated to only 1.26%.

“While inflationary risks are lower today, the drivers are different. While we don’t have these much excesses currently in the system, we always have to be mindful of inflationary risks,” says Ulrich, adding that the current leadership is trying to “contain the problem before it gets worse”.

Besides getting a grip on China’s near-term inflationary pressures, the country faces a couple of other ongoing challenges. For one, many of its companies, including the state-owned enterprises, remain highly leveraged.

However, Ulrich is optimistic China’s policymakers have anticipated the problems and have the ability and will to overcome the issues.

One example is the deleveraging campaign has been going on for the past year and a half where Chinese companies that went on an acquisition spree -- like HNA -- have been ordered to divest assets and pay down debt.

“The near-term priority is for the banks to give the corporate sector, especially the SMEs, sufficient credit. They’ve been experiencing lots of difficulties getting credit, so the monetary policy is a lot more accommodating,” says Ulrich.

There have also been measures to alleviate pressures on local governments, which has to split tax revenues equally with the central government.

But local governments still have to pick up the tab for recurring operational spending such as municipal services and local construction. In the past, they could rely heavily on land sales local tax collection

“They can now issue bonds to finance their spending to restore their balance sheets,” she adds.

Relative to other smaller emerging market economies, China is in a more viable situation than, say Argentina or Turkey, which have current and fiscal accounts deficits as they’ve relied too much on foreign debt to finance domestic growth, says Ulrich.

“As the US dollar has appreciated, they have troubles paying back their dollar-denominated debt. But not the largest emerging market China which is in a very different situation. We cannot paint all the emerging markets with one brush,” she says.

To be sure, there have been some bright spots in China’s economy. Ulrich points out that China’s consumer economy is still showing healthy growth. This bodes well for China’s ongoing nudge to boost domestic consumption in favour of exports to drive growth.

Consumers now account for 65% of China’s GDP growth, with exports contributing the bulk of the rest.  Retail sales, year to date, has grown about 10%; e-commerce, growing at 30%. China still in the long term, represents a “really massive” opportunity. “You people are too focused on risks and downside concerns,” says Ulrich.

She points out that the initial rounds of tariffs have yet to make a significant dent on China’s economic performance this year, although “material impact” might be seen in 2019, especially if the trade war persists.

For this year, JP Morgan’s estimates for China’s GDP growth has been trimmed from 6.9% to 6.4%, but still deemed “quite respectable”.

Might the US mid-term elections in November be the right platform and timing for Trump to ease off on trade with China as some analysts have suggested?

Nothing seems to point to this thus far, says Ulrich, which is why the Chinese leadership “isn’t just sitting around doing nothing” yet.