December’s Producer Prices Index (PPI) rose at its slowest pace in 13 months to 4.9% y/y, partly due to a high base effect while the Consumer Price Index (CPI) gained moderately by 1.8% y/y with core inflation up 2.2% y/y due to weak food prices.

Apart from the high base factor and weak food prices, China central bank’s deleveraging efforts in the past 6 months is also taking a toll. With expectations of the central bank continuing its current campaign, it is likely to transfer over to a slower growth.

Hence, a sustained moderation in PPI can burden factories with shrinking profits and higher debt and raise the question over the strength of global reflation. Furthermore, the central bank’s pressure to tighten its policy becomes less strenuous, allowing it to focus on other measures to address the corporate debt issue. We believe the benchmark lending rate of 4.35% will stay intact.

• December’s Producer Prices Index (PPI) rose at its slowest pace in 13 months. The PPI in December was up 4.9% y/y, the slowest growth since November 2016 compared to the 5.8% y/y seen in November. This could be partly due to a high base effect.

• We also found the Consumer Price Index (CPI) gaining moderately. While the headline CPI in December rose slightly higher to 1.8% y/y from 1.7% y/y in November, the core inflation eased marginally in December to 2.2% y/y from 2.3% y/y in November. Weak food prices are seen as the cause.

• Apart from high base factor and weak food prices, downwards pressure comes from the central bank’s deleveraging efforts which are being noticed in the past 6 months as the borrowing costs across its interest rate rose more than 30 basis points. Thus, with expectations of the central bank continuing its current campaign, it is likely to transfer over to a slower growth.

• Hence, a sustained moderation in PPI can burden factories with shrinking profits and higher debt and raise the question over the strength of global reflation. We feel it now leaves the policymakers with a freer hand on ongoing campaigns against industrial over-capacity and pollution.

• Furthermore, the central bank’s pressure to tighten its policy becomes less strenuous. This allows the central bank to focus on other measures rather than targeting its interest rates to address the corporate debt issue. We believe the benchmark lending rate of 4.35% will stay intact.

Source: AmInvest Research - 11 Jan 2018