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China's gradual recovery is underway

By Shen Lan (Shanghai Daily)

11:03, November 16, 2012

CHINA'S October macroeconomic data assured the market that the country is seeing a gradual recovery. The subdued Consumer Price Index (CPI) reading suggests little cause for concern about inflation pressure in the near term. Electricity generation, heavy industrial production and investment in new projects all picked up last month, pointing to a further gradual pick-up in growth momentum. The real-estate market is showing signs of improvement and is likely to revive in the first half of 2013. We look for a mildly supportive policy stance - characterized by flush liquidity but no interest rate or reserve requirement cuts - for the remainder of this year.

CPI inflation moderated to 1.7 percent year on year in October from 1.9 percent in September. On a month-on-month basis, seasonally adjusted annualised rate (SAAR) basis, we calculate that CPI inflation eased to 2.1 percent from 2.6 percent the previous month.

Little pressure

This suggests little inflation pressure at the moment. Food inflation dropped slightly to 2.7 percent from 3.3 percent (month-on-month SAAR), mainly due to the continued correction in vegetable prices, which offset the mild uptick in pork and rice prices. Non-food inflation remained at around 2 percent. Meanwhile, the contraction in the Producer Price Index (PPI) narrowed to 2.7 percent from 3.6 percent in September, suggesting less upstream deflationary pressure.

We maintain our view that inflation is bottoming out and will gather momentum, though we expect it to remain fairly benign this year. We expect higher year-on-year readings from November due to a reversal of the base effect and a pick-up in food prices. Persistent rises in pork prices, along with utility price reforms, will likely push CPI inflation onto a gradual upward path next year. We expect it to become a major concern in the second half of 2013.

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