China: PPI on a downtrend, but policy stimulus to limit decline – Standard Chartered

Standard Chartered analysis team suggest that China’s falling producer price index (PPI) has caught the market’s attention as PPI inflation fell to 0.1% y/y in February 2019, on the verge of sliding into negative territory, after peaking at 6.9% y/y in September 2017.

Key Quotes

“As PPI inflation falls, industrial profit growth is also slowing. The People’s Bank of China’s (PBoC’s) Q1 survey on 5,000 large industrial companies suggests that corporate confidence is weakening y/y and destocking pressure is building. Moreover, if falling PPI inflation drives a further slowdown in China’s nominal GDP growth (which slowed to 9.1% in Q4-2018 from 10.7% in Q4-2017), the PBoC is likely to face increased pressure to ease monetary policy and cut interest rates.”

“We expect moderate PPI deflation of 1% in 2019, recovering to inflation of 0.5% in 2020 (versus 3.5% in 2018). Negative base effects are likely to keep headline PPI in moderate deflation for most of 2019. We expect y/y PPI to bottom out at c.-2% in September, recovering to positive figures in early 2020.”