China CPI inflation to stabilize, not in sync with economic growth, CNY fairly valued

The Chinese wholesale prices of agricultural food products dipped slightly in April which suggests a MoM drop in consumer food prices. The food CPI is expected to have stabilized at around 2.4% YoY due to a positive base effect. As a result, the CPI inflation other than food is likely to soften mainly driven down by cooling housing prices and lower administrated retail fuel prices in April.

But, this will likely have little impact on the headline figure. The HSBC reported manufacturing PMI dropped in April. In fact, apart from a rebound in the oil price, major raw materials like metals and coals saw prices remaining on the downtrend in April. These suggested a slightly bigger decline in the Producer Price Index.

Hence, we expect China's CPI inflation to remain unchanged at 1.4% YoY in April which we gaze to retreat -0.2% MoM in April after a -0.1% MoM drop in March. Nevertheless, a positive base effect will probably result in a smaller decline in the headline figure (-4.5% YoY after -4.6% YoY).

Chinese forex reserves are reducing, this has been a signal that it's not intervening as much to keep its currency weak to strengthen exports. Long pegged as a currency manipulator, China might be about to get a big stamp of foreign-exchange credibility. The International Monetary Fund is reportedly close to calling the Chinese Yuan fairly valued. That's something that hasn't happened in more than a decade.