11 Jan 2016
China: Deflationary pressures persist – Nomura
FXStreet (Delhi) – Research Team at Nomura, notes that the Chinese CPI inflation ticked up to 1.6% y-o-y in December from 1.5% in November (Consensus: 1.6%; Nomura: 1.7%).
Key Quotes
“More importantly, PPI deflation remains deep in negative territory, unchanged at -5.9% y-o-y for five straight months on overcapacity problems in upstream industries and low commodity prices (Consensus: -5.8%; Nomura: -5.9%). On a month-on-month basis, PPI deflation worsened to -0.6% from -0.5% in November.
With this CPI and PPI data, we estimated that the GDP deflator continued on the course of deflation in Q4 (around -0.85% y-o-y) from an estimated -0.66% in Q3. This shows that China’s economy is technically in a deflation stage, exerting pressure on industrial profits and causes firms’ real borrowing costs to remain high.
Limiting the deflationary risk will pressure the authorities to ease policy further. We expect a moderate fiscal stimulus and accommodative monetary policy in 2016, with the budget deficit likely rising to 3.0% of GDP (2015: 2.3% of GDP) and four 50bp reserve requirement ratio and two 25bp interest rate cuts.
Deflationary risk also puts pressure on the CNY exchange rate. Our FX strategist, Craig Chan, expects moderate currency depreciation and forecasts CNY/USD to reach estimated fair value of 6.9 by end-Q2 2016.
For 2016, we expect CPI inflation to remain contained (1.9%) and PPI deflation to persist (-4.0%), with some improvement from 1.4% and -5.2% in 2015, respectively, due to base effects from commodity prices.”
Key Quotes
“More importantly, PPI deflation remains deep in negative territory, unchanged at -5.9% y-o-y for five straight months on overcapacity problems in upstream industries and low commodity prices (Consensus: -5.8%; Nomura: -5.9%). On a month-on-month basis, PPI deflation worsened to -0.6% from -0.5% in November.
With this CPI and PPI data, we estimated that the GDP deflator continued on the course of deflation in Q4 (around -0.85% y-o-y) from an estimated -0.66% in Q3. This shows that China’s economy is technically in a deflation stage, exerting pressure on industrial profits and causes firms’ real borrowing costs to remain high.
Limiting the deflationary risk will pressure the authorities to ease policy further. We expect a moderate fiscal stimulus and accommodative monetary policy in 2016, with the budget deficit likely rising to 3.0% of GDP (2015: 2.3% of GDP) and four 50bp reserve requirement ratio and two 25bp interest rate cuts.
Deflationary risk also puts pressure on the CNY exchange rate. Our FX strategist, Craig Chan, expects moderate currency depreciation and forecasts CNY/USD to reach estimated fair value of 6.9 by end-Q2 2016.
For 2016, we expect CPI inflation to remain contained (1.9%) and PPI deflation to persist (-4.0%), with some improvement from 1.4% and -5.2% in 2015, respectively, due to base effects from commodity prices.”