RHB | China | PPI Deflation Presages Further Easing, Despite Rebounding CPI

Economic Research	10 September 2015
China
Economic Outlook
PPI Deflation Presages Further Easing, Despite Rebounding CPI China’s CPI climbed up to a 13-month high, driven by rising food price. Rebound of pork price largely fuelled the increase of the headline index in the month, given shortage of supply of breeding hogs and live hogs. Looking ahead, we believe CPI is likely to continue the upward trend, due to surging pork price and a low base effect in the coming quarters. It is likely CPI will peak in late 1Q16 or early 2Q16, and reach 2.7% YoY in 2016. Though CPI is facing upside risks, we do not believe the increase will switch government’s easing stance, especially given moderating PPI. The monetary authority will stick to loosening policies to lower borrowing cost for corporates. Although the central bank will take a ‘wait and see’ strategy for further interest rate cut, it will implement more RRR cuts to offset capital flight and will more frequently use open market operations to adjust liquidity levels. Economist:  Zhang Fan| +8621 6288 9611 ext 105
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