China deflation risks point to more monetary easing

China's PPI deflation remained deeply negative at -5.9% y/y, extending its streak of negative readings to 43 months. The producer goods index remained at -7.7% as a widening in the contraction in raw material prices offset a narrower contraction in manufacturing prices. Meanwhile, mining sector fell to -21.2% from -20.9% in August. Within the mining sector, oil & gas saw a large decline to 40.6% (August -37.9%), while non-metal mineral rebounded to -2.4% (August: -2.8).

At an aggregate level, China's CPI inflation came in lower than expected at 1.6% y/y for September, down from 2.0% in August, mostly driven by food prices. Core inflation, which excludes energy and food, moderated by 10bp to 1.6%y/y.

"Weakening growth amid subdued CPI inflation and PPI deflation point to the need for further monetary easing. The tepid PMIs and deteriorating imports point to a further weakening in growth in September, and highlights the need for further monetary easing. We maintain our forecast of one benchmark rate cut of 25bp in Q4, with the timing being in October-November", says Barclays. 

Recent stability in USDCNY ahead of the early November IMF board review of the RMB's SDR inclusion may offer some comfort to the PBoC. 

PBoC is likely to announce one to two 50bp RRR cuts in Q4 2015, depending on capital flows, argues Barclays. Meanwhile, on 10 October, the PBoC permitted more commercial banks in 11 provinces to use qualified loans as collateral to borrow cheap funds from the central bank, a move intended to boost bank lending.