Headline CPI eased to +3.3% y/y in April, from +4.3% a month ago. This also marked a two-percentage-point fall from January’s peak. While the major growth driver remained food price, it has been decelerating as the corovavirus outbreak has hurt demand. Food price gained +14.8% y/y last month, easing from +18% in March. Meanwhile, pork price rose +96.9% y/y, compared with the record of +135.2% in February and 116.4% in March. Non-food price moderated to +0.4% y/y, from +0.7% in March. Deepening into deflation, PPI contracted -3.1%, compared with -1.5% in March and consensus of -2.6%. This marks the worse PPI reading in 4 years. Besides weakness in oil prices, global demand disruption has also trimmed production activities in China, reducing demand for commodities and upstream components.

Recent dataflow suggests that the worst is probably over in China. The economy has shown signs of recovery. Trade surplus widened to US$ 45.3B in April, from an upwardly revised US$ 19.93B a month ago. This came in much better than consensus of US$ 6.35B. Exports grew +3.5% y/y, compared with consensus of a -15.7% decline and March’s -6.6%. However, Imports contracted -14.2% y/y, worse than consensus of -11.2% and -0.9% in March. On a separate note, outstanding loan increased +13.1% in April, up from +12.7% a month ago. Money supply M2 also expanded +11.1%, up from +10.1% in March.

More activity data for April will be released later this week. While all of industrial production, retail sales and urban fixed asset investments should have stayed in contraction, the size were less severe than the prior months.

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Against this backdrop, PBOC will maintain an expansionary monetary policy stance. Indeed,  easing inflation has offered more room for the central bank to add more stimulus. At the quarterly monetary policy report, the central bank suggested that the prudent policy will be more “flexible” and “appropriate”. The goal will be to maintain liquidity at a reasonably ample level” Yet, the reference that it will “avoid excess liquidity flooding the economy” is deleted. We interpret this as a signal that further stimulus measures will be adopted.

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