Following a slowdown in Chinese exports in July, Chinese factory prices remained steady in the same month, in what could be a positive sign for industrial profits, while consumer prices experienced weaker growth.
The National Bureau of Statistics of China released on Wednesday the consumer price (CPI) and the producer price (PPI) indices for the month of July. According to the numbers, the PPI stood flat for the third consecutive month at 5.5%, as expected, on a yearly basis. Month-on-month the index rose for the first time in three months by 0.2%, supported mainly by increasing commodity prices, including steel and non-ferrous metals. In June, the monthly PPI contracted by 0.2%. With yearly PPI remaining unchanged, Chinese companies’ profits are expected to grow solidly as the effects of the capacity cuts are projected to emerge during winter.
Regarding the CPI, the index grew by 1.4% year-on-year, missing the forecast of 1.5% which was also June’s mark. On a monthly basis, the price of goods and services recovered from a downfall of 0.2% in the prior month, rising by 0.1%, while analysts anticipated a higher growth of 0.2%. Among the price categories, food prices, which weigh significantly on the index, declined by 1.1% year-on-year, though this was less than the 1.3% pullback observed in June.
Since inflation is still far below the PBOC target of 3% and GDP continues to grow steadily at (6.9% y/y in Q2), analysts expect the PBOC to either maintain policy on hold or to tighten it in order to reduce the leverage among the largest companies which are currently heavily indebted. Note that, the PBOC has kept interest rates at a record low of 4.35% since October 2015.
There was a limited reaction to the data as geopolitical tension and a weaker dollar was the overriding themes in forex markets today. The yuan hit another 10-month high, reaching 6.6773 per dollar today. The Australian dollar meanwhile plummeted by 0.5% to $0.7873 after the RBA Governor, Christofer Kent, in a Q&A session said that an unwillingly stronger aussie on the back of a weaker dollar would harm the Australian economy’s competitiveness. The mixed Chinese data, as well as disappointing figures on Australian consumer sentiment (-1.2% August vs 0.4% July) and home loans (0.5% m/m June vs 1.1% May), released today also pressured the aussie.
