China: Deflationary pressures persist – UOB Group

China’s Consumer Price Index (CPI) slowed further to 0.3% y/y in October (Bloomberg est: 0.4%; September: 0.4%). Core CPI (excluding food & energy) barely rose even though it inched higher to 0.2% y/y from 0.1% y/y in September. Services inflation ticked higher to 0.4% y/y (September: 0.2%) but consumer goods inflation moderated to 0.2% y/y (September: 0.5%) in October.

Prices near flat in October

Headline CPI and PPI weakened in October. The moderation in food prices, lower gasoline prices and the rapid cooling of travel demand after the National Day holidays kept prices in check. PPI was weighed by falling prices of some international commodities, but the National Bureau of Statistics attributed the narrowing pace of m/m decline to the government’s stimulus measures and domestic enterprise promotional activities.

We lower our forecast for China’s headline CPI to 0.4% (from 0.5%) and 0.9% (from 1.2%) for 2024 and 2025 respectively. We also revise down our forecast for the PPI to -2.2% (from -2.0%) in 2024 and -1.2% (from -0.9%) in 2025 as headwinds from US-China trade tensions are expected to increase next year following Trump’s re-election.

We expect the PBOC to keep its easing bias. Chinese banks have lowered their loan prime rates (LPR) by a larger-than-expected 25 bps in October and PBOC indicated another 25-50 bps reduction to banks’ reserve requirement ratio (RRR) by year-end to stabilise growth. The lower interest rates will support issuance of CNY10 tn in local government bonds in the multi-year debt swap plan approved last Friday (8 November).