China: PPI enters a slowing track, but deleveraging should continue - ANZ

David Qu, Markets Economist at ANZ, explains that China’s PPI continued slowing in April to 6.4% y/y (or -0.4% m/m), suggesting a slowing trend for the rest of the year.

Key Quotes

“We maintain our forecast for the annual PPI as 5.0-6.0% for 2017. The slowing trend of the PPI is in line with our view presented in December 2016 and January 2017, in the research notes of Inflation Holds the Key to the Economic Outlook and Black Swan Threats in the Year of the Rooster.”

“Commodity price movement is the reason behind the PPI softening. This is reflected in the weakening of the sub-PPI of the steel industry, which softened to 22.3% y/y from 36.8% in March and 40.1% in February. With the volatility of commodity prices and the rising price base in 2016, the y/y PPI should still face downward pressure.”

“Deleveraging remains the policy focus despite the weak PPI, and the tightening biased policy stance should stay in the medium term. Authorities have signalled prioritising financial regulation and deleveraging with the speech by President Xi in late April. We still see another two 10-bp hikes in the 7-day reserve repo rate, other open market operations and medium-term lending facility rates for rest of the year. The money market rates and bond yields will still face upward pressure.”