Headline CPI eased to +1.7% y/y in January, missing consensus of and December’s +1.9%. The slowdown was mainly driven by food price which fell -0.6 percentage point to +1.9%. Non-food inflation steadied at +1.7%. PPI decelerated sharply to +0.1% y/y, from +0.9% a month ago. The market had already anticipated a significant slowdown of +0.2% but the actual figure was even worse. Weakness in PPI reveals that the growth industrial profit is negatively affected.
FX reserve increased to US$ 3.088 trillion in January, from US$ 3.073 trillion a month ago. It also came in higher than consensus of US$ 3.082 trillion. We believe most of the increase was driven by valuation effect as the US dollar index slipped about -0.6% last month. While FX reserve has been a tool for PBOC to intervene renminbi’s movement, we do not see much manipulation this time, given that renminbi strengthened more than +2% during the period. USDCNY has been moving in a downtrend after peaking in October 2018. We believe the Chinese government intentionally allows its currency to appreciate as it prepares the negotiate with the US on trade issues.
As we await more data flow (industrial production, retail sales, fixed asset investment) in coming weeks, continuing softer growth is evident. As such, the Chinese government would continue to adopt more accommodative (the government insists that it is prudent and neutral) policy, both monetarily and fiscally.