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China September CPI eased
· ChinaR17;s CPI inflation fell to below 2% again, suggesting the spike in food prices in August was short-lived and largely due to weather and seasonal effects.
· PPI inflation continued to fall in spite of a strong rebound in commodity prices lately. Given it takes 3 to 4 months for PPI inflation to pass through to CPI inflation, China’s near-term inflation will remain benign, with an average CPI inflation this year at 3%, way below the 4% target.
· TodayR17;s inflation data, together with some forward-looking activity data, suggest the slacks in the economy remain large. We maintain our view that the reverse repo operations have not been effective in boosting growth, and the recent large amount of short-term reverse repo injections has made money market rates more volatile. It is time for the PBOC to revert to reserve requirement ratio cut to arrest a sharper-than-expected economic downturn.
additional details
· ChinaR17;s CPI inflation slowed to 1.9% y/y, from AugustR17;s 2.0%, broadly in line with ANZ (1.8%) and market expectations (1.9%). Food and rental costs rose 2.5% and 2.3%, respectively, in September, from 3.4% and 2.2% the prior month. Meanwhile, CPI inflation rose 0.3% m/m, compared with a 0.6% gain the prior month, indicating that the pace of increase has slowed.
· PPI declined by 3.6% y/y in September, compared with -3.5% in August, mainly driven by weak prices in mining and raw materials sectors.
Markets and Policy implications
· TodayR17;s headline inflation suggests that there is ample room to ease monetary policy further. While the PBOC could continue to use reverse repo operations to inject liquidity into the market, this short-term liquidity management instrument has not encouraged commercial banks to lend long to the real economy. As the funding sources of banks are getting shorter, their loan profile is shortening as well. This worrisome trend will discourage firms from investing for the long term as well.
· Although M2 growth surprised the market on the upside, to 14.8%, we believe the end of quarter effect has pushed this number temporarily higher. As the amount of maturing reverse repos remains huge, liquidity will tighten again in Q4.
· Of particular note, the maturing funds this and next week in the money markets will exceed RMB600bn, risking high volatilities in market interest rates amid the certainty of liquidity withdrawal and uncertain expectation of liquidity injection. This is the reason why we believe an RRR action could still be warranted.
China September CPI eased
· ChinaR17;s CPI inflation fell to below 2% again, suggesting the spike in food prices in August was short-lived and largely due to weather and seasonal effects.
· PPI inflation continued to fall in spite of a strong rebound in commodity prices lately. Given it takes 3 to 4 months for PPI inflation to pass through to CPI inflation, China’s near-term inflation will remain benign, with an average CPI inflation this year at 3%, way below the 4% target.
· TodayR17;s inflation data, together with some forward-looking activity data, suggest the slacks in the economy remain large. We maintain our view that the reverse repo operations have not been effective in boosting growth, and the recent large amount of short-term reverse repo injections has made money market rates more volatile. It is time for the PBOC to revert to reserve requirement ratio cut to arrest a sharper-than-expected economic downturn.
additional details
· ChinaR17;s CPI inflation slowed to 1.9% y/y, from AugustR17;s 2.0%, broadly in line with ANZ (1.8%) and market expectations (1.9%). Food and rental costs rose 2.5% and 2.3%, respectively, in September, from 3.4% and 2.2% the prior month. Meanwhile, CPI inflation rose 0.3% m/m, compared with a 0.6% gain the prior month, indicating that the pace of increase has slowed.
· PPI declined by 3.6% y/y in September, compared with -3.5% in August, mainly driven by weak prices in mining and raw materials sectors.
Markets and Policy implications
· TodayR17;s headline inflation suggests that there is ample room to ease monetary policy further. While the PBOC could continue to use reverse repo operations to inject liquidity into the market, this short-term liquidity management instrument has not encouraged commercial banks to lend long to the real economy. As the funding sources of banks are getting shorter, their loan profile is shortening as well. This worrisome trend will discourage firms from investing for the long term as well.
· Although M2 growth surprised the market on the upside, to 14.8%, we believe the end of quarter effect has pushed this number temporarily higher. As the amount of maturing reverse repos remains huge, liquidity will tighten again in Q4.
· Of particular note, the maturing funds this and next week in the money markets will exceed RMB600bn, risking high volatilities in market interest rates amid the certainty of liquidity withdrawal and uncertain expectation of liquidity injection. This is the reason why we believe an RRR action could still be warranted.
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