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1.Muted consumer inflation and narrower producer deflation, what's your read?
The CPI growth continued to fall slightly for fourth consecutive months from the 2.3% level in Mar to 1.7%. The decline is due to a smaller rise in food prices, especially pork prices, and actually a price decline in transportation and telecommunication prices, while all other major categories registered a very mild price increase. The pork price not only constitutes a significant weight of the index, its smaller increase reflects easing pressure on corn prices and less jobs in the cities attracting farmers to leave their farms.
The PPI declines less severely, which is consistent with the fading effect of overcapacity in the manufacturing sector. We have seen that the government is trying hard to cut overcapacity and there is less unhealthy competition. Producer prices have been in deflation for four-and-a-half years and finally the fall is declining starting July. But we should be mindful that there is still a medium-term process for it to recover.
2.The lower consumer price inflation means more room for easing, but do you think that's likely given the government's mandate to cut overcapacity and remove asset price bubbles?
Internal prices cannot be determined alone without the consideration of external prices. We have seen since the renminbi reform in Aug last year, the renminbi has declined from the 6.3 level to the current 6.7 level. The renminbi has already released some pressure especially after the fall of the pound due to the Brexit. Rather than necessarily a declining trend, an alternative interpretation is that the government is accepting a wider fluctuation between the renminbi and the dollar. From that regard, a higher tolerance of fluctuation means that we do not necessarily have to respond to the US dollar as quickly to devaluate or appreciate the renminbi. And internally, less overcapacity means less bankrupting state-own enterprises the government needs to fund, and the debt the local government in each city is easing as the housing prices had risen sharply last year. These all add up to less easing pressure. But if the dollar continues to strengthen, the renminbi will continue to face a downward pressure. In fact, there is an unexpected rise of 1.5% in imports last month, the first increase in nearly two years, exports declined at a slower than expected 2.8% annualized rate. This is consistent with a less expensive renminbi in the international market.
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