China’s CPI inflation for March reached 2.3% y/y, little below expectations. On an annual basis, food price inflation continues to be high; however, sequential prices seem to have begun normalizing. Food prices rose 7.6% y/y, as compared with 7.3% in the previous month. Meanwhile, producer prices contracted 4.3% y/y in March, as compared with February’s contraction of 4.9%. Prices in processing industries, raw materials and mining dropped 3.6% y/y, 8.8% y/y and 16.3%m y/y respectively. Meanwhile, non-food prices were unchanged from February. It rose 1% y/y.
High food prices continue to majorly contribute to the headline CPI inflation; however, the impact was little less than consensus expectations. Food prices are likely to continue to be high in the following months before declining in H2 2015, according to HSBC. There are already some early signs of normalization in prices, added HSBC. The National Bureau of Statistics has stated that vegetable and pork prices dropped 5.5% and 1.3% respectively last month.
Slow non-food price inflation, along with persistent normalization in food prices indicates that CPI inflation for the entire 2016 is expected to be within the government’s target rate of 3%, noted HSBC. This will provide the central bank with sufficient room to further ease and underpin growth, added HSBC. Moreover, PPI deflation indicated signs of easing in March. This is expected to be because of both stabilization in demand and rebound in international commodity prices, said HSBC.
However, it is too soon to say that China is out of deflation. Indeed, the current restructuring in industry and additional reduction in capacity in 2016 are likely to weigh on growth, according to HSBC. Meanwhile, external demand recovery continues to be subtle. Hence, continued easing of policy is significant to make sure the recovery is sustained, noted HSBC.
“We see further monetary easing, including 50bps policy rate cut and 350bps reserve ratio cut, as well as a more expansionary fiscal policy. We expect GDP growth to average 6.7% y-o-y in 2016”, added HSBC.
