China：CPI Data Above Market Expectations04-09 15:24 Caijing
•CPI inflation was 3.6% y/y in March, compared with Jan-Feb’s average of 3.9% and market consensus of 3.4%. While dwelling costs eased to 2.0% from 2.1%, food prices increased by 7.5% versus February’s 6.2%. On a m/m basis, CPI rose 0.2%, driven by rapid food price gains, from -0.1% in February.
•PPI inflation declined further to -0.3% y/y in March, 0.3ppt lower than last month, despite the raised retail fuel prices during the month.
•Q1 data: CPI rose 3.8% y/y; PPI gained 0.1% y/y.
China's headline CPI inflation beat market expectation on rising food and fuel prices. We expect inflationary pressures to rise going forward as growth momentum has picked up and structural inflationary pressures remain high. For example, the ongoing reforms in the pricing mechanism of public utilities and resource products will likely boost price pressures further in the rest of the year. Once the output gap narrows further, it is highly possible that the headline inflation will rebound again, easily exceeding the government targeted inflation rate at 4% in Q2.
This uncertain inflation outlook suggests that the PBoC will remain cautious in its policy operations, especially when growth momentum appears to have picked up strongly in March with the official PMI surging to 53.1. Therefore, we are sceptical about the market call that the PBoC will need to cut the lending and deposit rates to boost the economy at this stage. We view the likelihood of such a policy event low because real interest rates have returned to a negative territory, and the authorities are still fearful of rampant shadow banking activities that could again lead to large outflows of bank deposits from the formal banking system.
While a cut in required reserve ratio (RRR) is an important policy instrument to ease monetary policy, we should not ignore the role of the open market operations as they are carried out on a weekly or even a daily basis. We believe an important indicator to watch is the size of weekly matured PBoC bills and repos, which in turn will help determine the timing of the next RRR cut. Our tally of market liquidity conditions shows that the maturing PBoC bills and repos in April will be as large as CNY399bn. In case that the intensity of PBoC's open market operations continues to remain as light as it has been over the past two months, this means that overall market liquidity will remain plentiful.
Furthermore, it is reported that the Chinese commercial banks have attracted more than CNY2.2trn worth of deposits in March, largely led by a surge in fiscal deposits. This suggests that new loans and M2 growth in March could have picked up strongly. To some extent, this also reduces the urgency to cut RRR in the near term. We believe a RRR cut could be postponed till May or June.
Balancing these factors, we think that today's CPI inflation number is unlikely to lead the PBoC to ease monetary policy soon. As such, we believe that PBoC's policy outlook will continue to be biased towards caution.
CONTRIBUTORS: LI-GANG LIU, HAO ZHOU
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