China economic review weekly (Oct.19, 2015)

1. CPI and PPI (September 2015)

- The CPI inflation moderated to 1.6% y/y from 2.0%, as food inflation eased significantly.
- Pork prices saw 0.4% m/m rise, after a 7.7% increase in August and a 9.9% climb in July.
- Non-food inflation stayed intact at 1.0% y/y and core inflation eased a tenth to 1.6% y/y.
- The sequential decline in PPI narrowed to 0.4% from 0.8%, while y/y PPI was flat at -5.9%.

The CPI inflation moderated visibly in September as the rise in pork prices cooled amid
improving supply. The sequential PPI deflation narrowed, but y/y rate, at -5.9%, was still the
worst since late 2009, underscoring the persistent overhang of domestic overcapacity and
global commodity bear cycle. The subdued inflation report underscores the poor state of
aggregate demand. It opens the door wider for the PBOC to further relax monetary policy.
Another interest rate cut in Q4 is likely, given currency depreciation pressure has subsided for
now, and the central bank may take the opportunity to fully liberalize deposit rate, so as to
facilitate RMB’s inclusion into the SDR at the IMF review meetings in November.

2. China: External trade (September 2015)

- Exports growth improved to -3.7% y/y from -5.5% y/y, better than expected.
- Imports dived 20.4% y/y, the worst since H2 2009, on imported deflation and soft demand.
- Trade surplus stayed lofty at USD 60.3bn, up 95% y/y, typical recessionary improvement.
- Exports growth, at -1.9% y/y year to date, was undoubtedly a big culprit of the downturn.

Exports growth registered a small improvement in September. But it might be unsustainable
without signs of pickup in external demand or stronger competitiveness of Chinese exports.
The -1.9% exports growth in the first three quarters was the worst in the past 15 years, barring
the crisis-ravaged 2009. Undoubtedly languishing exports has been a culprit of the economic
downturn. That said, what the PBOC has done in the past two months suggests it does not
have the intention to depreciate the currency to bolster exports. Instead, in the near term, to
secure RMB’s inclusion into the SDR is the primary goal, and a stable exchange rate might be
the best option before the IMF SDR review in November.

3. China Sep Money Supply
via BNP,
The RMB 9.9trn new loans in the first three quarters have topped the annual size in 2014, reflecting larger quotas granted by the PBOC. TSF also grew robustly, amid the explosion in bond financing thanks to easier access to bond issue and money rushing to buy bond after the stock rout. TSF underestimates credit supply, as local government bond issue and ABS actually downsize banks’ loan book. Even without considering the understatement, outstanding TSF growth at 12% y/y, and M2 growth at 13.1% y/y, continued to outpace our estimated nominal GDP growth of 6.8% y/y in the first three quarters. That means, overall financial leverage of Chinese economy kept rising, and the efficiency of credit to generate growth continued to deteriorate.

4. Those were mixed signals... but, SHCOMP increased further last week... due to not too bad indicators with expectations for additional policies as Li commented...

5. This week, ahead of GDP and I.P... expect continuing sustainability of risk assets...

6. IBs are upgrading oil price forecast...! Barclays, last week...
(cf. GS = super cycle, BCA = solar...)

7. but, BDI seems somewhat cautious... albeit analysts argue the effect from China national holidays... needed to follow...!