Consumer inflation in September rose 2.5% y/y driven by higher food cost while the underlying inflation grew slower by 1.7% suggesting weak domestic demand. Meanwhile, factory gate inflation cooled for the third straight month by 3.6% y/y, while industrial profit for the first eight months grew slower by 16.2% y/y. These figures suggest the economy is slowing amid escalating trade tensions with the US and weaker domestic demand.

We reiterate our view that the PBoC will further cut the current 14.5% reserved required ratio (RRR) by another 150bps in 2019 to funnel cash into an economy hit by slowing domestic demand and a trade war with the US. The central bank will also keep the benchmark lending rate unchanged at 4.35% through to the end of 2019 as the it will focus on other monetary policy levers, such as interbank rates.

We project the economy would grow by 6.5% in 2018 and 6.2% in 2019. On the inflation front, we expect the consumer inflation to be at 2.2% in 2018 and 2.4% in 2019. Although tariffs will push up prices which are inflationary, the huge excess capacity still lingering means that demand for goods and services is still soft. So the pass-through of the tariff prices on domestic prices will be limited.

• Consumer inflation in September rose 2.5% y/y from 2.3% y/y in August. Higher consumer inflation was due to the increase in food prices, up 3.6% y/y in September from 1.7% y/y in August. But the underlying inflation eased. September’s core inflation which excludes volatile items such as food and energy rose, albeit slowly, by 1.7% y/y versus 2.0% y/y in August.

• Meanwhile, the factory gate inflation (producer price) cooled for the third straight month in September. It rose at a slower pace by 3.6% y/y in September from 4.1% y/y in August. At the same time, industrial profit growth for the first eight months grew slower by 16.2% y/y versus 17.1% y/y during the first seven months of 2018. We believe this could be an indication of slowing economic momentum amid escalating trade tensions with the US.

• These three key data i.e. underlying inflation, factory gate and industrial profit somewhat suggest the economic momentum is losing some steam. It suggests softening domestic demand hurt by the ongoing trade war between the US and China. Hence we reiterate our view that the People’s Bank of China (PBoC) will continue to reduce the reserved required ratio (RRR) after the recent 100 basis points cut with the aim to funnel cash into an economy hit by slowing domestic demand and a trade war with the US. While we expect the PBoC to keep the RRR steady for the rest of 2018, we foresee a 150 basis points reduction in the rate to 13% by the end of 2019. The current RRR is 14.5%.

• Meanwhile, we expect the central bank to keep its benchmark lending rate unchanged at 4.35% through to the end of 2019 as the central bank will focus on other monetary policy levers, such as interbank rates. The PBoC last moved its benchmark policy in October 2015, easing rates.

• We project the economy would grow by 6.5% in 2018 and 6.2% in 2019. On the inflation front we expect the consumer inflation to be at 2.2% in 2018 and 2.4% in 2019. Although the tariffs will push up prices which are inflationary, the huge excess capacity still lingering means that demand for goods and services is still soft. So the pass-through of the tariff prices on domestic prices will be limited.

Source: AmInvest Research - 17 Oct 2018