China: Reflation continues, but the recovery needs to spread out – HSBC

Julia Wang, Research Analysts at HSBC, notes that China’s December PPI inflation came in higher-than-expected at 5.5% y-o-y and the upside surprise was largely due to the surge in oil prices towards year-end, which translated into significant price gains in oil and energy sectors.

Key Quotes

“Heavy industries also continue to post double-digit price increases. The industrial sector has been reflating over the past year, and the pace has accelerated towards year-end. But so far there is little sign of this spreading to the non-industrial part of the economy, which accounts for over two-thirds of GDP.”

“Headline CPI came in weaker due to easing food prices, while core CPI inflation was flat. A better policy mix, focusing on reviving private sector investment, as well as more market-based supply side adjustment will help to broaden the base of the recovery, and make it more sustainable in 2017. Until we see more signs of broad-based rise in inflation pressures, the PBoC should have good reasons to keep policy unchanged.”