Data released by the National Bureau of Statistics of China yesterday reveals that Chinese consumer inflation continues to trend down. Chinese prices went up 4.1% y/y in December from 4.2% in November, driven by sharp slowing in non-food prices, which registered a rise of 1.9%, while food prices grew 9.1%.
The slump in core inflation is clear evidence of struggling demand, reflected in the December 2011 Purchasing Managers Index (PMI). The Manufacturing PMI rose marginally into expansion in December, recording 50.3 from 49 in November. The marginal expansion can be explained by holiday buoyancy leading up to the Chinese New Year. Both the New Orders Index and Inventories in December remained in contractionary territory, recording 49.8 and 48.3 respectively.
Third quarter 2011 Gross Domestic Product had also showed. GDP fell to 9.1% from 9.5% the quarter prior, and 9.7% recorded in the first quarter. These numbers suggest that the last quarter will be below 9% on a momentum basis, due to the weak manufacturing and demand numbers during the last quarter.
The continued downward trail in inflation gives more impetus to further monetary easing. We expect that the Peoples Bank of China will loosen reserve requirements and may also cut the policy rate, particularly if inflation falls below 4% in the coming months.
Xhanti Payi
Assistant Economist
Download the presentation slides