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Another soft set of Chinese economic numbers

It has been a bad start to the month for economic data coming out of China, with almost all the numbers released so far missing expectations. Today’s inflation figures for January were no different and further underscore how soft the economy really is. Consumer prices rose a disappointing 0.8% y/y (expected 1.0% y/y), after rising 1.5% y/y in December. This is slowest pace of growth in five years and is further evidence that domestic demand is struggling. China’s PPI also came in below expectations as producer prices remain in deflationary territory for the 35th consecutive month.

Looking back at China’s disappointing economic data from the beginning of the month

All of this in on the back of very soft trade numbers and disappointing manufacturing data:

• China’s monthly trade balance was pushed to a record $60.03bn by a dismal 19.9% y/y fall in imports (expected -3.2%). Lower import prices can partly explain January’s soft import numbers, but we still can’t excuse them. The slide in imports is the worst since Chinese factories were slashing inventories in response to the GFC. Also, exports fell for the first time since March 2014 (actual -3.3% y/y vs. expected 5.9% y/y) and they are the only thing propping up growth at the moment.

• Sentiment in China’s manufacturing sector is also deteriorating as economic activity shrinks. The official reading of Manufacturing PMI for January showed that pessimists outweighed optimists for the first time since September 2012. The Index dropped 49.8 from 50.2. This cynical view was supported by a slightly softer reading from HSBC’s private sector Manufacturing PMI (49.7).

The recent softness in Chinese economic data has promoted Beijing to step-up its efforts to promote economic activity. The latest big move by the PBoC was a 50 bps cut to the reserve requirement ratio – this dictates how much capital banks must hold in reserve – for banks that primarily lend to agriculture and small-to-medium sized firms. The move will likely push around 50-100 million yuan into the economy, but we expect more stimulus will be need if China hopes to expand by even 7% this year.

Market reaction

The Australian dollar looked confused by today’s Chinese inflation numbers, with the commodity currency falling in the immediate aftermath of the disappointing numbers before rising shortly thereafter. It appears the market is more encouraged by the prospect of more stimulus from Beijing than it is disappointed with the actual numbers; AUDUSD is testing an important short-term resistance zone around 0.7840 at the time of writing. Beyond here we are eyeing 0.7880; a break here could see the pair to 0.8000.



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