China: Inflation at the centre stage - BBH

Research Team at BBH, suggests that the focus has been in China's CPI in today’s session after it has been fairly stable in early 2015 mostly between 1.5% and 2.3%.  

Key Quotes

“December's CPI eased to 2.1% from 2.3%, just above the 12-month average of 2.0%.  Food prices rose 2.4% while non-food prices increased by 2.0%.  Nothing particularly remarkable.  However, as we have previously noted, the focus is on producer prices, which escaped from multi-year deflation a few months ago.  They have risen sharply since.  In December producer prices rose 5.5%.  The Bloomberg median was for a 4.6% increase after the 3.3% rise in November.  Mining (21.1%) and raw materials (9.8%) drove the headline increase.   Separately (but related), iron ore prices rose 5.5% today to their best level in nearly a month.”

“The increase in producer prices, especially in the context of stable consumer prices may be a short-term help for China.  However, short-term benefits may be offset if the higher prices slows, or even reverses, efforts to address the vast surplus capacity China has built in various industries, including steel, aluminum, glass, and cement.”

“The onshore yuan (CNY) ticked higher today, offsetting yesterday’s losses in full.  However, the offshore yuan (CNH) weakened for the third sessions.  The offshore yuan is understood to be more of a speculative vehicle than the more restricted onshore yuan.  As last week's short-squeeze fades, CNH is expected to trade through CNY.”