Headline CPI in China climbed +0.1 percentage point to +1.9% y/y in June, in line with expectations. On monthly basis, inflation contracted -0.1%, compared with consensus of a +0.1% increase. Yet, this is the smallest contraction since March this year. In June, food price registered modest recovery (+0.3% y/y vs May’s +0.1%) for the first time since February, as driven by narrowing pork price deflation (Jun: -12.8% y/y vs May: -16.7%). This was, however, partly offset by widening fruit price deflation (Jun: -5.3% vs May: -2.7%), and deceleration in vegetable price inflation (Jun: 9.3% vs May: 10.0%) and egg price inflation (Jun: 17.1% vs May: 20.8%). Non-food inflation steadied at +2.2%. Meanwhile, PPI accelerated to +4.7% y/y from +4.1% in May. This has exceeded expectations of +4.5%.

Inflation, staying way below PBOC’s target of +3%, is expected to pick up in coming months. There are several reasons for this forecast. First, we expect rising upstream, price (e.g. PPI) would pass through to downstream CPI. Meanwhile, the hog-to-corn price ratio has fallen to the lowest level since 2Q12. The situation would likely be exacerbated by China’s retaliatory tariff on a wide range of US exports, including feedstock for hogs. Higher input price would probably lift prices of hogs, eventually sending headline inflation higher.

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FX Reserve

FX reserves increased +US$ 1.51B to US$ 3.112 trillion in June, compared with consensus of a drop to 3.1 trillion. During the period, onshore renminbi (CNY) fell more than -3% against US dollar while the CFETS index was down -1.03%. Meanwhile, the DXY index added +0.5% in June. Appreciation in US dollar suggests that valuation effect in June’s FX reserve is negative, as other currencies in China’s FX reserve basket weakened. However, we would not confirm that the surprising increase in FX reserve in June was driven by PBOC’s intervention to depreciate renminbi as the rise was minimal. The July figure would be closely watched as renminbi has already traded with huge volatility in the first two weeks of this month,昨 US-China trade conflict intensified.


China recorded a trade surplus of US$ 41.6B in June, beating consensus of US$ 27.6B. Exports jumped +11.3% (consensus of +10%) while imports were up +14.1% (+20.8%). Notwithstanding trade conflict with the US, China recorded high surplus with the US of US$ 29B. While the June appears unaffected by US trade tariff, the focus should be put on July’s data as tariff on the first US$ 34B of goods has taken effect.

Money Supply and Loan Growth

Money supply M2 grew +8% y/y in June, easing from +8.3% in the prior month. This also missed expectations of a +8.3% expansion. In response to disappointing data in April and May, PBOC did not follow the Fed in adopting rate hike in June. The RRR cut, effective July 5, is expected to release RMB 700B to the market. We look forward to see its impact on money supply growth. New renminbi loans increased to RMB 1.84 trillion, beating consensus of RMB 1.6 trillion and May’s RMB 1.15 trillion. Outstanding loan growth edged +0.2 percentage point to +12.7%, slightly higher consensus of +12.5%.



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