Flat Inflation causes more easing by China

China's December inflation data mostly driven by food prices and came around 1.6%. Food inflation was 2.7% y/y in December (previous: 2.3%), led by the notable flow in vegetable and fruit prices on unfavourable weather conditions. Likewise, non food inflation remained flat with uptrend in housing market recreation inflation being offset by the declines in clothing and medical inflation. The annual 2015 headline CPI inflation was therefore 1.4% y/y, down from 2.0% in 2014, and was consistent with our forecast.

The producer goods index was flat at -7.6% y/y, led by a decline in the manufacturing sector price but offset by narrowed contractions in the mining and raw material sectors. Overall, we think the extended PPI deflation (2015: -5.2%, 2014:-1.9%) will continue to dampen inventory restocking by manufacturers amid tepid external and domestic demand.

Such data suggests signs of stabilization remain to be seen with continued downside risks to growth. The NBS will release 2015 GDP on 19 January, and Barclays maintains 2015 GDP growth forecast of 6.8% (2016: 6.0%). Due to the deflation risks and the weak economic outlook require monetary policies to stay accommodative for an extended period. There are scope for two 25bp benchmark rate cuts and two 50bp RRR cuts in H1 to support liquidity and lending.