JAKARTA - IHS Global Insight provides updates on Chinese CPI and PPI growth, which moderated following unsustainable rallies driven by weather or speculation during the first quarter. Following is the key points:
Key Points:
- China’s consumer price index expanded at a slower pace in May, slowing to 2% year-on-year (y/y).The key factor in the slowdown was from the food, tobacco and liquor component, which accounts for about one-third of the index, slowing from the 6% to 4.7% y/y expansion. The only other major category to deteriorate was transportation, where price growth decelerated 0.2 percentage points to 2.6% contraction, due mostly to lower prices of refined fuels in y/y terms. Non-food and non-energy CPI grew 1.6%.
- China’s producer price index contracted by ‘only’ 2.3% y/y, its weakest pace of contraction since October 2014.The improvement was almost entirely led by much slower contractions in China’s mining and quarrying industries, although raw materials production also saw some improvement. Price trends for manufactured consumer goods were generally unchanged and remained in relatively mild contraction, although durable consumer good prices contracted at a slightly faster pace.
- Sequential price growth worsened for both producers and consumers.Month-on-month (m/m) CPI fell to a 0.5% contraction, compared to 0.2% contraction in April, mostly due a 21.5% contraction in prices of fresh vegetables, which authorities attributed to the exit from a harsh winter that limited supply. PPI expanded by 0.5% m/m, compared to 0.7% a month prior, mostly due to slower sequential growth among ferrous metals and energy sectors.
Outlook:
Relative improvements in year-on-year PPI will continue to reduce the downside for nominal profits in related industries, notably those related to commodities where profits collapsed during 2015. Weaker consumer price growth will weigh on nominal retail sales figures, and create further scope for monetary policy easing. Concerns of volatility stemming from the EU Referendum and US interest rate hike uncertainty forced China’s central bank to abstain from rate cuts in the second quarter. Weaker domestic price growth and a slightly more supportive global environment will increase the chance of the People’s Bank of China further easing monetary policy early in the third quarter.
China’s exports fall at faster pace in May; trade balance remains high
Weak exports will harm Chinese manufacturers, although still falling imports will aid the net exports component of GDP in the second quarter
Key Points:
- China’s merchandise exports declined4.1% in May year-on-year (y/y), the fastest pace since February, consistent with IHS’s expectations of a deceleration relative to April.
- Exports contracted faster to the United States and Hong Kong, expanded more slowly to ASEAN, and slipped from expansion to contraction to the European Union(EU).
- China’s key export categories recorded consistent decelerations, with nominal exports of mechanical and electrical products falling7% in May y/y (-3.3% in April) and exports of hi-tech products dropping 8.5% (-5.3% in April). Exports of integrated circuits went from a 25.1% expansion in April to a 6.9% contraction in May. Volumes exported were stable to slightly deteriorated, indicating continuing deflation in China’s key manufactured goods.
- Chinese merchandise imports slid0.4% in May y/y, the slowest pace of contraction since October 2014. Imports from the EU, ASEAN and Japan all went from contraction to expansion, while imports from South Korea contracted at nearly one-third the pace as in April. Imports of mechanical and electrical products declined 1.5% in May y/y (-5.9% in April), while the value of oil imports contracted 5.7% (-28.5% in April). Oil import volumes grew 38.7% and motor vehicles by 9.8%, indicating deflation in import prices as well.
- China’s trade balance in May was USD 50 billion, compared to USD 45.6 billion a month prior or USD 57.1 billion one year ago. China’s year-to-date trade balance is USD 217.4 billion, compared to USD 212.6 billion during the same period in 2015.
IHS Global Insight Views:
Steady deflation in merchandise trade, including those for manufactured goods, is suggestive of limited improvement in China’s producer price index for May, which is to be published on 9 July 2016.
China’s trade surplus continues to outpace gains in 2015. That will help bolster the net exports component of GDP during the second quarter, although it is mostly due to weaker imports rather than healthy foreign demand.
Note: The report is provdided by Brian Jackson, China Economist, IHS Global Insight