At first glance, inflation data out of China this morning suggests that deflationary pressures appear to be easing. Consumer prices rose at least at an annual rate of 0.7%, much faster than recently (0.2% in October). However, a closer look at the details again raises doubts, notes Volkmar Bohr, foreign exchange market analyst at Commerzbank.
The People’s Bank of China is guiding the Chinese yuan higher as the real exchange rate faces downward pressure
“The monthly rate was again negative at -0.1%, for the first time since June, although food prices rose 0.5% due to a large increase in the fresh fruit category (+7.2% m/m). Services prices actually fell by 0.4% m/m. The rise in the annual rate is therefore much more attributable to the base effect from last year than to increased inflationary momentum – apart from fruit, and still no signs of a trend. A reversal in producer prices as well.”
“Inflation in China is likely to remain lower than in Europe or the United States for the foreseeable future, putting persistent downward pressure on the real exchange rate of the Chinese Yuan. This should usually be offset by a nominal appreciation of the Chinese Yuan, which could lead to a depreciation of the US dollar/Chinese Yuan exchange rate.”
“The People’s Bank of China (PBoC) also seems to be taking this very seriously at the moment. In recent months, the exchange rate set by the central bank daily against the US dollar has been falling continuously, which means the Chinese yuan is strengthening. We believe this trend is likely to continue.”
