China’s December inflation remained soft, PPI continued to slide

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 11, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - China's consumer inflation moved up slightly year on year in December. The National Bureau of Statistics on Saturday reported inflation in China came in at 1.6 per cent in December, matching estimates and up from November’s 1.5 per cent. The producer price index (PPI) however continued to fall. The PPI for December stayed unchanged at -5.9 per cent in December, declining for the 46th straight month. The PBoC estimates China's consumer price index to climb 1.7 per cent in 2016. The PPI, according to the central bank will continue to slide and fall 1.8 per cent year-on-year, the central bank said in a working paper last month.

    The weak fundamental signify the deflationary pressure building up and highlights the agony of the Chinese manufacturers. Zhou Hao, economist at Commerzbank in Singapore feels given the slowing economy, “Chinese companies will have to reduce their debt as further expansion in many industries will only lead to more loss.”

    The manufacturing PMI for December has also been dismal. The Caixin PMI data which focuses on smaller and medium-sized companies showed manufacturing PMI fell to 48.2 in December, down from 48.6 registered in November. The official PMI figure though a little better than the Caixin figure, remained below the 50 mark. China Beige Book International (CBB) on the other hand also noted a drop in growth in input prices and sales prices for Chinese firms to record lows in the fourth quarter. These factors dimmed hopes of a recovery in 2016.

    China is at a juncture where it cannot afford to allow deflationary pressures to pile ,more so given the sharp decline in manufacturing sector growth and exports. If consumers are reluctant to spend, companies will forced to cancel or reduce investment fearing further slump in prices. This in the process will further slowdown the economy.

    Disturbed by the weak fundamentals and drawing from the example of Japan where a strong currency in a low price environment has kept growth suppressed for decades now, China decided to guide the yuan lower twice last week. The central bank probably wanted to lower the rates for the already debt laden companies in China. However, the measure though lowered borrowing costs of Chine companies; it raised the cost of servicing the offshore debt. Unfortunately, the PBoC’s measure did not manage to help China’s cause. China’s stocks fell drastically causing cancellation of stock market operation two times last week.
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