Underlying momentum in PPI (m-o-m) is easing, although at aslightly slower pace than expected
4Food prices dragged headline CPI lower while the PPI was drivenhigher by metal prices. We think the rise in PPI may be transitorydue to base effects。
The note includes our updated macro views, Dec data forecasts and amonthly chartbook on the Chinese economy.
Prices in China rose faster than market had expected in August,with the CPI and PPI ticking up to 1.8%y-o-y and 6.3% y-o-y,respectively.
As CPI will likely remain close to the lower boundary of the PBoC's comfortzone, we expect policymakers will maintain stable interbank liquidity and therepo rate will remain range-bound at 2.6-3.0% in 2H. Instead, enforcingregulatory tightening to rein in leverage could be back in focus, particularly afterthe party congress in October, which could slow broad credit growth to ~13%YoY by end-2017and ~11.5% by end-2018(from around 14% in June) (ChinaEconomics: Update on Inflation and Policy Outlook, July 19, 2017).
Food prices continue to put upward pressures on CPI inflation, butcore inflation held steady
4September CPI inflation slowed to 1.6%, in line with marketexpectations. Produce prices accelerated to 6.9% and it was higherthan consensus。
In terms of China macro, 2017 was (again!) full of surprises, but the goodnews is that most of them are positive. In our view, the top five surprises arecurrency, exports, inflation, property sales and financial regulation.
The acceleration in monthly inflation was mainly due to higher foodand commodity prices.
Bottom line: PPI YoY held steady at 5.5% for the third consecutive month in July,helped by improvement in non-commodity prices, while CPI edged down onlower fuel and healthcare prices YoY. We retain our relatively constructiveoutlook for core CPI and non-commodity PPI on the back of healthy externaldemand and domestic job market. As headline CPI will likely remain close to thelower boundary of the PBoC's comfort zone, we believe policymakers willmaintain stable interbank liquidity, while regulatory tightening could be back infocus, particularly after the party congress in October.