China: CPI inflation likely picked up seasonally – Standard Chartered

China’s official manufacturing PMI dropped to 49.1 in January from 50.1 in February, entering contractionary territory again since October. The official survey suggests a broad-based m/m decline in demand and production activity. Only the equipment manufacturing PMI stayed above 50 in January, while hi-tech, consumer goods and high-energy-consuming manufacturing PMIs fell below 50. External headwinds have increased with the latest US announcement of additional 10% tariffs on China imports, weighing on the overall manufacturing outlook, in our view, Standard Chartered's economists report.

Mindful of holiday distortions

"The services PMI retreated to 50.3 in January after jumping to 52 in December, despite an acceleration in tourist-related services activity (including railway transport, accommodation and catering). Meanwhile, our SME survey and high-frequency data suggest that real-estate performance softened from December. New home sales in major cities dropped m/m, partly due to seasonal effects. In addition, the construction PMI fell to new low of 49.3 in January, partly affected by weather and holiday disruptions."

"Only FX reserves, inflation and monetary data for January will be released this month. China’s trade and real activity data for January and February will be combined and released in March, in order to smooth Lunar New Year effects. We expect FX reserves to have remained relatively stable. The DXY index dropped modestly and UST yields picked up."

"We expect CPI inflation to have edged up to 0.5% y/y in January from 0.1% in December. Food CPI likely picked up. Vegetable and fruit prices picked up seasonally on holiday demand. Meanwhile, pock prices dropped m/m, per interim data. Non-food CPI likely edged up due to an increase in prices of tourist-related services, entertainment and household services. In addition, the National Development and Reform Commission (NDRC) raised domestic gasoline retail prices following the movement in international oil prices."