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China CPI increase in November beats expectation, PPI falls for the 45th straight month

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 9, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - Official data released today showed China's Consumer Price Index (CPI) increased 1.5 per cent year on year in November, beating a Reuters poll estimate of 1.4 per cent increase. Substantial rise in the cost of food resulted in better than expected CPI figured. Food CPI increased 2.3 per cent on-year and non-food items rose 1.1 per cent.

    The National Bureau of Statistics however reported a 5.9 per cent fall in Producer Price Index (PPI), a little less than the 6-per cent market forecast. It has remained unchanged from last three months’ rate, marking the 45th month of decline. Declining price in the non-ferrous metal smelting category and oil processing industry caused PPI in November to move down 0.5 per cent month on month.

    Output prices of production materials dropped 7.6 per cent in November, while those of consumer goods were down only 0.4 per cent. The rise in CPI in China is moving ahead on the transition track, albeit slowly. The positive CPI figure signifies the existent strength in consumer demand.

    Stagnant manufacturing sector hurt PPI

    The poor performance of the manufacturing sector which continued to stagnate hurt the PPI. On account of this many companies with an objective to stay competitive dropped their wholesale prices. The fall in producer prices was apparent not only in the industrial goods segment but also in autos and computers, which fall under the value-added international goods segment. Tom Rafferty, Asia economist for The Economist Intelligence Unit in Beijing is however confident that PPI's steep falls will moderate in the coming months. But he feels it will be "some time before we see a better alignment between supply and demand in the industrial sector."

    How devaluing the yuan will help shed deflationary pressures

    As mentioned above the prices of value-added international was seen falling in November. This fall in tradeable goods prices will likely step up pressure on the government to let the yuan devalue further. It will support export for one. Also, as Bill Adams, senior international economist at PNC Financial Services noted “a weaker yuan will put upward pressure on yuan-denominated prices of commodities that can be traded as well as manufactured products and ease deflationary risks."

    Government’s supportive measures to support prices in 2016

    The fifth plenum charted objectives for 13FYP had stressed on the need to draw up measures that would support China to graduate from a middle income status by 2020. An informed decision to gradually move towards a consumer led growth model was taken. Rebalancing the economy was the need of the hour and the challenge was to implement reforms while not compromising on growth.

    The Chinese central bank slashed rates six times in the past one year along with cutting the RRR to stimulate demand and combat deflationary pressure which was weighing on growth. This has helped the industrial sector as credit to troubled firms increased. Such supportive measures together with property market upturn will likely help to further boost domestic demand in 2016. An upbeat domestic demand can loosen the pressure on the central bank to opt for additional easing. The overall fiscal policy can be expected to remain expansionary in 2016.
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