China: Inflation pressure subsides in June – UOB

Economist at UOB Group Ho Woei Chen, CFA, reviews the recently published inflation results in the Chinese economy.

Key Quotes

“China’s Producer Price Index (PPI) and Consumer Price Index (CPI) inflation moderated in June.”

“Domestic measures to contain commodity price gains may have helped to stabilize the PPI but elevated global crude prices and higher freight costs as pick-up in seasonal demand towards year end exacerbates the tight supply chain which in turn may further contribute to the price pressure. The PPI inflation is likely to stay elevated in 2H21 and we maintain our full-year forecast of 7.5% (2020: -1.8%).”

“The pass-through to CPI may continue to stay muted due to a more gradual recovery in demand. The headline inflation may slip slightly below 1.0% y/y in 3Q21 before rebounding in 4Q21. With 1H21 CPI inflation averaging just 0.5%, we have revised down our full-year 2021 CPI forecast to 1.1% from 1.9% (2020: 2.5%).”

“The more moderate CPI backdrop in 3Q21 may provide the government further room for targeted banks’ reserve requirement ratio (RRR) cuts.”

“We see scope for a targeted reduction in RRR in 3Q21 while we maintain our expectation for the Loan Prime Rate (LPR) to be kept unchanged this year with the 1Y LPR and the 5Y & above LPR at 3.85% and 4.65% respectively.”