Recent developments in Chinese PPI do not signal fundamental economic improvement, says Commerzbank

The recent developments in Chinese producer prices do not point toward any fundamental improvement in the economy. The recent pick-up in China’s PPI inflation dynamics is something worth noting. For the first time since February 2012, China’s headline PPI inflation turned positive.

More importantly, there is an acceleration in the momentum of PPI, on an annualized 3m/3m basis, China’s PPI climbed significantly since the beginning of this year, although the momentum has slowed somewhat since Q2 2016.

There is little pass through effect from PPI to CPI inflation yet, as underlying CPI momentum remains subdued. In general, China’s core CPI inflation remains stable. While China’s CPI rose 0.7 percent m/m in September, much higher than expected, the rise was largely contributed by food prices (1.7 percent m/m), due to seasonality and weather effects (floods and typhoon).

Disposable income (in real terms) for urban residents increased 5.7 percent y/y in the first three quarters of 2016. This wage growth is mostly due to the declining labour force due to China’s demographic transition.

However, the growth of disposable income continues to underperform GDP growth since 2013, which indicates that there is little underlying inflationary pressure. Looking ahead, we believe that wage growth will be moderate given the challenging economic outlook.

"Looking ahead, we believe that wage growth will be moderate given the challenging economic outlook," Commerzbank said in its latest research report.