Easing bias seemingly intact on China's softer CPI

China released CPI data for September this morning, eased to 1.6% y/y from 2% in August. It was dragged lower by food prices which moderated to 2.7% from 3.7% in August. Non-food prices remained subdued at 1.0% from 1.1% in August. 

The country's CPI remains well below the government's target of 3% for 2015 and is at 1.4% year-to-date. September's PPI remained in negative territory at -5.9%, unchanged from August. This marks the 43rd consecutive month of decline and reflects depressed industrial production and weak commodity prices. 

Year-to-date, PPI is at -4.8%. The deflation trend in PPI gives a clearer and seemingly more accurate take of the modest growth picture for the economy. 

If anything, the modest CPI reading and continued deflation in PPI leaves the door open for PBoC to pursue further targeted policy easing or at least maintain an easing bias, says Commerzbank. For example, over the weekend, PBoC extended the pilot program aimed to boost bank lending capabilities. It allows banks to pledge a broader range of assets, including bank loans, as collateral to borrow from PBoC. 

The program is currently in place in Shandong and Guangdong but will be expanded to nine other provinces including Shanghai and Beijing. For USD-CNY, it gained 0.3% yesterday to 6.3410 and is up another 65 pips to 6.3475 this morning after the inflation report, notes Commerzbank.