China Inflation

China's consumer price inflation eased for a second consecutive month in December to reach its weakest level in seven months, the latest figures from the National Bureau of Statistics revealed Thursday.

Meanwhile, China's producer prices extended its decline to 22 months in December, fueling concerns about industrial overcapacity.

The annual consumer price inflation fell to 2.5 percent in December from 3 percent in November. Economists had forecast a slowdown to 2.7 percent. On a monthly basis, the consumer price index rose 0.3 percent.

In the whole of 2013, inflation was 2.6 percent, well below the government's target of 3.5 percent.

In December, food price inflation slowed to 4.1 percent from 5.9 percent in November, while non-food prices rose 1.7 percent. The People's Bank of China has refrained from monetary easing in the view of potential upside risks from the housing market as well as the ongoing reforms in the economic and financial sectors.

The producer price index fell 1.4 percent year-on-year in December, at the same pace as in November. The decline was slightly steeper than the 1.3 percent drop expected. In the full year of 2013, the PPI fell 1.9 percent.

Premier Li Keqiang has pledged to curb industrial overcapacity, which economists believe, is driving down producer prices, thus hurting firms' profits.

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China Inflation Quickens to Fastest Pace in 4 Months

China’s inflation accelerated in May to the fastest pace in four months on food costs, while a decline in factory-gate prices moderated.

Consumer prices rose 2.5 percent from a year earlier, the statistics bureau said today in Beijing. That exceeded the median 2.4 percent estimate in a Bloomberg News survey of economists. The producer-price index fell 1.4 percent after a 2 percent decline the previous month.

Inflation below the government’s full-year target of 3.5 percent leaves room for more monetary easing in an economy projected to grow this year at the slowest pace since 1990. While Premier Li Keqiang is resisting broad stimulus, limited loosening has included yesterday’s announcement of a cut in some banks’ reserve requirements from June 16, intended to support agriculture and small businesses.

“Low inflationary pressure provides room for further reserve-ratio cuts in the coming months,” said Hu Yifan, chief economist at Haitong International Securities Group Ltd. in Hong Kong.

The Shanghai Composite Index (SHCOMP) gained 1.1 percent to 2,052.53 at the close, its biggest increase since May 12.

Food Costs

Food prices rose 4.1 percent in May from a year earlier, compared with a 1.7 percent gain for non-food costs. China’s economy may expand 7.3 percent this year, according to a Bloomberg survey of analysts, down from 7.7 percent in 2013 and compared with a government target of about 7.5 percent.

Consumer-price increases “won’t impact the scale and pace of the ongoing mini-stimulus,” said Lu Ting, head of Greater China economics at Bank of America Corp. in Hong Kong. He forecast that inflation will be “around” 2.5 percent for the next several months.

A slide in home sales and construction and government efforts to rein in credit risks are weighing on the nation’s expansion. Producer prices have been falling since March 2012.

Capital Economics Ltd. in London estimated a 50 billion yuan ($8 billion) liquidity boost from the 0.5 percentage point reserve ratio cut announced yesterday by the central bank for some lenders, while China International Capital Corp. said the move released 70 billion yuan.

Rural Banks

The change applied to two-thirds of city commercial banks, 80 percent of non-county level rural commercial banks and 90 percent of non-county level rural cooperative banks, the central bank said. The move also covered finance firms and financial-leasing and automobile-financing companies.

Combined with moves including an April 25 cut to reserve ratios for rural lenders, the central bank will add about 545 billion yuan of liquidity by the end of June, according to Zhang Zhiwei, an economist at Nomura Holdings Inc. in Hong Kong.

Yuan forwards are headed for the biggest three-day advance since 2012 after the central bank boosted the currency’s reference rate and China’s trade surplus rose in May to a five-year high.

On June 6, Premier Li told officials from eight places, including Beijing, Guangdong, Zhejiang and Hebei, to be proactive in supporting their local economies. While the government doesn’t put gross domestic product above everything else “this doesn’t mean we don’t want a reasonable economic growth rate,” Li said, according to an official statement.

Weak Demand

Falling imports in May showed the weakness in domestic demand that is making the Chinese economy more reliant on exports and pressuring Li to roll out broader measures to support growth. The authorities’ steps have so far included tax breaks and accelerating some government spending.

Analysts are divided on whether the government will announce a broader stimulus. Four of 20 analysts surveyed by Bloomberg News in May forecast a national reserve-ratio cut by the end of June, while 10 of 18 said a reduction would occur by the end of 2014.

“Overall liquidity is appropriately ample and the basic direction of monetary policy is unchanged,” the PBOC said in yesterday’s statement. “The PBOC will continue implementing a prudent monetary policy, keep appropriate liquidity, achieve reasonable and appropriate growth in money, credit and aggregate financing, and promote healthy and stable economic operations.”

China stocks up, blue-chips eye 4th day of gains on metals strength; HK down

1. "China's stocks were higher on Thursday, with the blue-chip CSI300 index on track to rise for the fourth day as raw material shares powered ahead on the back of soaring metal prices."
2. "The Shanghai Composite Index gained 0.1 percent, to 3,244.21 points, while Shenzhen's start-up board ChiNext fell 0.3 percent."
3. "Shares in China's major base metal producers, including Shenzhen Zhongjin Lingnan Nonfemet and Jiangxi Copper rose sharply as futures prices of copper, zinc and nickel jumped, maintaining strong upward momentum."
4. "The Hang Seng index dropped 0.4 percent, to 22,597.88 points, while the Hong Kong China Enterprises Index lost 0.2 percent, to 9,646.98."
5. "The prospect of rapid capital flight from emerging markets is a key risk factor for investors in Asia, especially under U.S. President-elect Donald Trump's policies. Traders are betting on a faster pace of monetary tightening by the Fed as Trump's policies are expected to boost domestic economic growth and push inflation higher."

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