Disinflation to persist in China

China's consumer price inflation unexpectedly accelerated in February, rebounding from the five-year low hit in the previous month. Producer prices, however, continued to fall, adding pressure on the policymakers to undertake new measure to spur growth.

China's CPI recorded 1.4 percent rise in February, beating analysts' expectation of a rise of 1 percent, while producer price index (PPI) fell 4.8 percent, the National Bureau of Statistics said on Tuesday.

"February's seasonal pick-up in food inflation will likely prove short-lived and we still expect inflation to fall back below 1 percent in coming months," wrote Julian Evans-Pritchard of Capital Economics in Singapore. "Nonetheless, today's inflation data suggest that downward pressure on broader prices has begun to ease."

China cut its gross domestic product (GDP) growth forecast for this year to 7 percent last week, from the 7.5 percent goal set in 2014. Economists are worried over the rising risk of deflation in the country owing to falling global oil prices and industrial overcapacity.

"Efforts by the authorities to stave off deflation through easing monetary policy have been ineffective so far", Tom Rafferty, China economist with The Economist Intelligence Unit (EIU) in Beijing, commented on the news. "We expect them to turn to fiscal policy in order to boost demand; the government has signalled its intentions in this regard by committing to a wider budget deficit this year. These measures, combined with an anticipated rise in global oil prices through the second half of the year, ought to be enough for China's economy to avoid outright deflation. However, disinflation will persist, and the government's targeted rise of "about 3%" in the CPI looks wildly unrealistic."  

USD/CNY remained largely unchanged in the Asian session as the People's Bank of China set an almost flat official midpoint rate. Prior to market open, the central bank set the midpoint rate at 6.1572 per dollar, lower than the previous fix of 6.1563. Spot market opened at 6.2640 per dollar and was trading at 6.2639 at midday. Pair is likely to find a strong support at 6.1800 and resistance at 6.3000 levels.

"The USD/CNY fix came out slightly stronger than expected at +9 points versus our model estimate of +6 points. However, this was not enough to excite the market as onshore USD/CNY spot has remained comfortably below 6.2650. This has kept USD/CNH offered on moves above 6.2750", Westpac said in a report on Tuesday.