China: PPI deflation over - Danske

According to analysts from Danske Bank today’s PPI data from China showed that producer price deflation is over in China, boosting industrial profits and thus supporting Chinese equities.

Key Quotes:

“Today’s producer prices index (PPI) for August showed another month of increase. The PPI rose 0.2% m/m and has now increased in five out of the past six months. The six month increase in PPI is 3.8% on an annualised basis, coming from -7.0% in early 2015.”

“Producer price deflation is thus over in China, boosting industrial profits and thus supporting Chinese equities. In July, industrial profits increased 11% y/y, after falling more than 2% on average in 2015.”

“The rise in PPI inflation is mostly a reflection of higher commodity prices on industrial metals. A slight reduction in overcapacity is also helping but the main driver is commodity prices, which have seen a lift from a boost to Chinese construction.”

“We expect the end to deflation to become more visible in Q4, when we predict the y/y rate will move into positive territory. It rose to -0.8% y/y in August but, in our view, is likely to turn positive in Q4, as base effects kick in due to big m/m declines in PPI in late 2015.”

“CPI inflation fell from 1.8% y/y to 1.3% y/y in August (consensus 1.7% y/y) due to a big fall in food inflation, which fell from 3.3% y/y to 1.3% y/y. Inflation excluding food was unchanged at 1.4% y/y. Hence, consumer inflation is still very subdued and far from the target of 3%. This leaves room for policy easing and China’s premier Li Keqiang announced this week that China plans to ease fiscal policy further in H2.”