Tim Condon, Chief Economist at ING, suggests that the persistent deep Chinese PPI deflation is squeezing cash flows in heavily leveraged corporates and they expect the PBOC to cut policy interest rates by 25bp before month end.
Key Quotes
“February CPI and PPI data are due tomorrow at 9:30am local time. The consensus forecasts are 1.8% YoY for the CPI (prior 1.8%) and -4.9% for the PPI (prior -5.3%). The energy price shock slowed headline inflation to 1.4% in 2015 from 2.0% in 2014. The bounce to 1.8% in January from 1.6% in December came from a jump in the food component. We think it would take a big food supply shock or energy price spike to cross the PBOC’s inflation red line, which we believe is 3%. Our 2016 inflation forecast is 1.5% (consensus 1.6%).
The PPI data is more interesting because of what it implies for China’s heavily-indebted manufacturing enterprises. The January data revealed that the 18% MoM drop in global crude prices produced another large monthly decline in the PPI. We expect the deep – around 5% – PPI deflation to persist until global oil prices stabilize long enough that a low-base effect kicks in, which would be toward the end of the year if oil prices don’t fall too much from January’s average (US$33.96 for Brent). When the low-base effect finally kicks in we expect PPI deflation to return to the 2-3% range it averaged from 2012 to mid-2014.
Deep PPI deflation squeezes business cash flows and calls for lower interest rates. We expect the PBOC to cut policy interest rates by 25bp before month.”
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