Factory gate inflation (producer price) rose at a slower pace in December by 0.9%y/y to bring the full-year average to 3.5% while consumer inflation slowed to 1.9%y/y, bringing 2018’s inflation to 2.1% y/y which is below the government target of 3%.

The weaker data for both the producer and consumer prices suggests evidence of cooling domestic demand and further slowdown to the economic growth in 2019. If this trend continues, worries could potentially flare up and cause jitters to the global markets, especially with the growing possibilities for the producer price to fall into the negative region.

The weak factory gate and consumer inflation figures came at a point where the trade war between the US and China is biting the Chinese economy, reflected by the poor showing from the manufacturing sector which contracted in December for the first time in more than two years. We hope the current trade negotiation sees a breakthrough.

Thus, we foresee the government continuing to support growth through fiscal stimulus measures as well as monetary tools such as more cuts in the required reserve ratio to further inject liquidity. A reduction in the policy rate remains in the cards, but its effectiveness remains unclear. We reiterate our 2018 GDP outlook at 6.5% while for 2019, we are looking at 6.2%. On the inflation front, we expect consumer inflation to be at 2.0%.

• Factory gate inflation (producer price) rose at a slower pace of 0.9% y/y in December from 2.7% y/y in November to bring the full-year average to 3.5%y/y, which turned out to be much lower than the 6.3% y/y reported in 2017. The December reading marks the lowest growth since September 2016. Apart from the nosedive in crude oil prices, the slower gain was also due to a weaker gain from the prices of industrial inputs which deteriorated further to -3.81% y/y in December from -2.93% y/y in November while final consumption goods price stayed flat at 0.2% y/y in December.

• In tandem with the slower gain in the producer price, the consumer inflation also slowed to 1.9% y/y in December from 2.2% y/y in November which translates to a 2.1% gain for the full year of 2018, the same level as in 2017. It is below Beijing’s target of 3%. Core inflation stayed flat at 1.8% y/y in December. Hence, for the full year of 2018, it read at 1.9% y/y from 2.2% y/y in 2017.

• The weaker data for both the producer and consumer prices suggests evidence of cooling domestic demand. The weak factory gate inflation denotes signs of further slowdown to the economic growth in 2019. Continued weak PPI will weigh on the profits of factories and risk raising debt. It may enter the negative territory very soon given the negative sequential growth it already recorded. Should this trend continue, worries could potentially flare up and cause jitters to the global markets.

• The weak factory gate and consumer inflation figures came at a point where the trade war between the US and China is biting the Chinese economy. This is reflected by the poor showing from the manufacturing sector which contracted in December for the first time in more than two years. Meanwhile, we hope the current trade negotioation sees a breakthrough.

• Thus, we foresee the government continuing to support growth through fiscal stimulus measures. Monetary support will also continue to take place, with more liquidity injection into the system from required reserve ratio cuts. A reduction in the policy rate remains in the card, but its effectiveness remains unclear. We reireate our 2018 GDP outlook at 6.5% while for 2019, we are looking at 6.2%. On the inflation front, we expect consumer inflation to be at 2.0%..

Source: AmInvest Research - 11 Jan 2019