Economic Highlights (China) - 11/04/2014

China: Inflation Edged Up to 2.4% yoy in March  

• China’s consumer price inflation rose to 2.4% yoy in Mar from 2.0% in Feb, broadly in line with expectations (OSK-DMG: 2.3%, consensus: 2.4%). Meanwhile, the Producer Price Index (PPI) continued its year-on-year decline for the 25th consecutive month, falling 2.3% in Mar and pointing to subdued upstream price pressures partly due to excess production capacity in a number of industries.

• The increase in the CPI inflation largely reflected higher food prices, which accounted for nearly 57% of the overall price increase in Mar. Food prices - the largest component constituting about one-third of the CPI – were up 4.1% yoy following an increase of 2.7% in Feb, primarily due to high prices for fruits, vegetables, milk & dairy products, as well as aquatic products, which rose 17.3%, 12.9%, 11.3% and 7.7% yoy amid a low base last year. The prices for beef and mutton also increased 8.2% and 7.1% yoy. Meanwhile, pork prices extended their decline for a third consecutive month, down 6.7% yoy in Mar as the pig industry enters into an overproduction era. Non-food prices, on the other hand, rose by 1.5% yoy in Mar, slightly lower than the 1.6% increase in the prior month, as housing inflation edged up at a slower pace while transportation and communication costs dropped 0.4% yoy. The rise in housing cost eased to 2.5% from 2.8% in Feb, as home rentals, utility prices and costs of home building saw slower increases yoy. The costs of clothing and medicines & medical were slightly higher in Mar, up 2.3% and 1.2% yoy, compared to 2.2% and 1.0% in the prior month.

• MoM, the CPI inflation fell 0.5% in Mar compared to a 0.5% increase in Feb, mainly due to lower food inflation as demand eased after the Chinese New Year. Food prices fell by 1.6% MoM, following the 1.7% rise in Feb, led by declines in the prices of vegetables and pork, which dropped 5.4% and 7.1% MoM. Warmer weather also caused fruit prices to fall 1.6% MoM, while the prices of eggs, beef, mutton, and aquatic products also declined. Non-food prices recorded a slight increase of 0.1% MoM in Mar, after remaining flat in the preceding month. Housing inflation fell to 0.2% MoM from 0.3% in Feb, with home rentals edging up more gradually. In Mar, the PPI dropped 0.3% MoM after decreasing by 0.2% in Feb, mainly led by falling prices in industries such as coal and ferrous metal mining, chemical fibers as well as the manufacture of non-ferrous and ferrous metals.

• Overall, inflation remained moderate, which will allow the government more room to fine-tune its policies to support growth and move forward with further reform of its resource pricing mechanisms. Looking ahead, we expect consumer price inflation to remain largely contained given the cyclical downturn in the domestic pork prices, which will help keep food prices broadly stable. Meanwhile, overall imported inflation is also expected to remain muted on the back of generally low global commodity prices. However, some upward price pressures remain, including rising wages, high property prices, price reforms and a likely upswing in domestic demand, which could feed through into higher inflation expectations and headline inflation in the coming months. Taking these factors into account, we expect inflation to average 2.8% this year, compared with 2.6% in 2013.

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