China's deflationary risks hints further monetary easing

China's CPI inflation came in lower than expected at 1.6% y/y for September, down from 2.0% in August, driven mainly by food prices. Core inflation moderated by 10bp to 1.6% y/y. PPI deflation remained deeply negative at -5.9%, extending its streak of negative readings to 43 months. Meanwhile, China's exports fell 3.7% y/y in USD terms (-1.9% YTD) in September, slightly better than the 5.5% decline in August. 

Nevertheless, the structure of merchandise exports shifted towards high-tech industries, with shipments of transportation equipment and mobile phones climbing 25% and 13.9% y/y YTD, respectively. 

However, the contraction in imports accelerated to 20.4% last month (August: -13.8%). The trade surplus in September was USD60.3bn, a seven-month high but coming mainly from import compression.

Looking ahead, the tepid PMIs and deteriorating imports point to a further weakening in growth in September, and highlight the need for further monetary easing. 

"We maintain our forecast for one benchmark rate cut of 25bp in Q4, with the timing being in October- November. Recent stability in USDCNY ahead of the early November IMF board review of the RMB's SDR inclusion may offer some comfort to the PBoC. The central bank is likely to announce one to two 50bp RRR cuts in Q4 15, depending on capital flows", states Barclays.