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14 October 2015
Desk Commentary
September CPI +1.6%, weaker than expected, PPI -5.9% in line
China | Macro
Consumer prices propped up by food; ex-food a dismal +1%
Conditions for producers aren’t improving
Edging closer to more stimulus
September data on China’s inflation picture was worse compared to
August, with continued weakness in both consumer and producer prices,
dimming the picture for a rebound in the second half. While the data
clearly points to a weakening economy, it may be a market positive as
pressure for policymakers to offer further stimulus grows.
Official CPI came in at a +1.6% YoY, lower than expectations of a +1.8%
YoY rise, while PPI was -5.9% YoY, meeting consensus.
Figure 1 - China Consumer Price Index. Source: National Bureau of Statistics
Figure 2 - China Producer Price Index. Source: National Bureau of Statistics
Sep-15
1.6%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
China CPI
Sep-15
-5.9%
-7.0%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
China PPI
Ryan Roberts, CFA Senior Research Analyst
+852 2210 0825 [email protected]
Hank Terrebrood Managing Director - Sales
+852 2210 0833 [email protected]
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14 October 2015
Desk Commentary
While dismal PPI data isn’t exactly shocking (PMI data released earlier in the month signalled ongoing
weakness for the sector), CPI deserves further scrutiny. When stripping out food prices, CPI grew at a
lackluster +1, something which challenges the idea of a consumer-led economic rebound in China, and
puts pressure on the official growth target of ‘around’ +7% YoY.
CPI Closer Look
CPI for consumer goods was +1.4%, while prices of consumer services rose +2.1%. The headline
number was +1.6%, weaker than expected, and well below the official target of +3% YoY for the year.
On a cumulative basis through September, overall consumer prices were up +1.4%.
Figure 3 - China CPI Excluding Food. Source: National Bureau of Statistics
Food prices were once again the main driver of the headline reading. Fresh fruit prices rose +10.4%,
adding about +0.3% to the total, while meat prices gained +8.2%, adding about 0.6% to the total figure
(pork prices were again the main driver, rising +17%, contributing +0.5% to the meat price index).
Seeing weak consumer prices for non-core goods (i.e. food), the notion that China’s consumers will
come to the rescue for flagging demand is a tougher argument to make. Recent trade data underscores
this view. While exports were a better-than-expected -3.5% YoY (vs. -6% est.), imports fell at an awful
-20.4% pace, well beneath the already bruising -16% expected. It seems that despite the mountain of
savings often touted by China bulls, confidence, not cash on hand, is a key factor in the consumption
story.
Sep-15
1.0%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
China CPI Ex-Food
14 October 2015
Desk Commentary
PPI Closer Look
September’s data included another month of output prices falling, but input prices falling faster.
According to the NBS, producers’ output prices fell -5.9% YoY in September, the same as in August,
and input prices fell to -6.8% YoY, the latter hitting levels not seen since late 2009.
Figure 4 - China PPI Raw Materials Price Index. Source: Bloomberg
One conclusion that a manufacturing sector mired in deflation provides is that policymakers may well
add more stimulus to support the sector while companies struggle to find the new sustainable
equilibrium to match the ‘new normal’ of slower Chinese, and global, economic growth.
The argument that a reallocation of capital may provide better results than keeping zombie capacity
on line is indeed rational, however we suspect that it is politically untenable in China. Bluntly put, the
social cost of shuttering factories with idle capacity isn’t something that can be easily accomplished
in one go. Instead, incremental progress is more likely. This fits with recent efforts in China to reform
SOEs; presumably companies run with a ROE mandate instead of social stability are less likely to
spectacularly fail and require a bailout).
In the meantime, however, this sector is likely to continue to be a drag on the economy, both
domestically and abroad, as it adjusts to waning demand at a glacial pace.
Sep-15
-6.6%
-15%
-10%
-5%
0%
5%
10%
15%
China PPI - Raw Materials Price Index
14 October 2015
Desk Commentary
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