Two days ago we looked at how China’s diverging export (faster) and import (slower) growth rates signaled a two-speed recovery, with strong consumption (especially services), also evident in the Labor Day holiday data, but not-so-robust industrial activity, which still faces headwinds from external demand and a slow recovery in property investment.
Overnight we got another confirmation, this time in the form of China’s latest CPI and PPI when April inflation surprised the market to the downside.
China’s CPI eased notably from 0.7% in March to 0.1% in April, the lowest print since March 2021 and one tick away from deflation.
According to SocGen, the decline was mainly driven by food inflation (-0.4%) and energy inflation (-0.2%), while core CPI remained unchanged at 0.7%. The decline in food inflation was due to pork prices amid abundant supply, and vegetable prices thanks to the warm weather. Fuel inflation dropped from -6.4% to -10.4% due to weak international prices and base effects.
In contrast, services CPI picked up from 0.8% to 1.0%, supported by prices of air fares, hotels and tour packages, as the sector is the main beneficiary of reopening. Rental inflation also recovered from -0.5% to 0.3% with the mom rate stabilizing at 0%. However, core goods CPI declined. While clothing inflation rebounded slightly from 0.8% to 0.9%, that of transportation facilities dropped from -3.3% to -4.0% due to ongoing discounting, and that of household appliances eased from -0.2% to -1.2%, reflecting more tepid demand relative to services.
Moving to factory gate prices, PPI slipped further into deflation, from -2.5% to -3.6% due to base effects and weaker momentum, with a 0.5% mom decline. The main culprit was upstream prices, as the key commodities saw a broad-based decline in prices, reflecting weak demand for commodities (also evident in the latest imports data). That raises concerns over the strength of industrial activity, which likely lost momentum due to softer global demand, still subdued property investments and still high inventories. PPI of consumer goods also remained tepid, with a mom decline seen in durable goods.
In short, it is clear that the service sector is normalizing quickly since the beginning of the year, but at this stage the broadening of the reopening recovery remains to be seen with risks from slowing exports, a sluggish property recovery, still weak confidence. The service-driven nature of this recovery also means there are less inflation spillovers to the rest of the world this year
While it is true that inflation momentum has been modest, today’s numbers also overstate the weakness as they were mainly driven by food and upstream prices and base effects. The data points to more room for the PBoC to keep policy accommodative, especially coupled with today’s surprising plunge in new credit creation, but given its lagging nature, there is still a high bar for more headline easing.
Tyler Durden
Thu, 05/11/2023 – 20:40
