China: Flat CPI inflation; PPI deflation eases in April - Nomura

Research Team at Nomura, notes that China’s April CPI inflation was unchanged at 2.3% y-o-y for a third consecutive month, in line with market expectation (Consensus: 2.3%; Nomura: 2.4%).

Key Quotes

“Food prices showed a seasonal decline, led by vegetable prices (-12.5% m-o-m), though pork prices continued to rise sequentially, pushing up its year-on-year inflation rate further to 33.5% y-o-y. Non-food price inflation rose to 0.1% m-o-m in April from -0.1%, with prices of all sub-categories rising during the month.

PPI deflation eased significantly, to -3.4% y-o-y in April from -4.3% in March, surprising expectations (Consensus: -3.7%; Nomura: -3.9%). On a month-on-month basis, PPI inflation rose to 0.7% in April from 0.5% in March, mainly led by prices of industrial products in the mining, raw material and processing sectors. The significant moderation of PPI deflation was largely due to the rise in commodity prices and capacity utilisation rate arising from stronger fixed asset investment growth.

Looking ahead, we expect CPI inflationary pressures to remain, largely driven by food prices (pork prices in particular) and rental inflation, while PPI deflation may continue to narrow. Combined with rising financial imbalances, we see future policy easing to be more cautious.

Given signs of the People’s Bank of China refocussing on financial stability, we see downside risks to our call of three more 50bp bank reserve requirement ratio (RRR) cuts and one 25bp interest rate cut over the rest of 2016. We continue to believe that the debt-fuelled rebound in investment growth will be short-lived, and maintain our forecast of real GDP growth slowing to 6.2% in 2016.”