MNI ANALYSIS: PPI Subdued Despite Trade War and Weakening Yuan

--China July PPI +0.1% M/M, +4.6% y/y; July CPI +2.1% Y/Y

By Iris Ouyang

     BEIJING (MNI) - China's factory gate inflation was subdued in July and

consumer inflation remains well within the government's target, reflecting the

limited initial impact of either the trade war or weakening yuan on prices.

     Producer price index (PPI)rose 0.1% m/m in July, down from the 0.3% gain in

June,  data released Thursday by China's statistics bureau showed. PPI rose 4.6%

y/y in July, lower than the 4.7% gain in June, but above the median estimate of

4.4% in the MNI survey based on forecasts of 20 financial institutions.

     Despite higher oil prices in July, the 0.1% drop in raw material prices on

cheaper global commodities helped the modest easing in PPI growth, with the

weaker yuan and initial U.S. tariffs having limited initial impact on industrial

raw material prices.

     According to China's statistics bureau, the 1.6% m/m drop of non-ferrous

metal smelting and flattening along with the 0.5% drop in ferrous metal mining

prices contributed to the PPI deceleration in July. Higher prices for crude and

natural gas mining at 1.3% offset any further downward impact.

     The 42.1% y/y surge in crude and natural gas mining prices underpinned the

overall y/y PPI gain.

--CPI

     The consumer price index (CPI) rose 0.3% m/m in July, the first m/m growth

since February. On year, CPI increased 2.1% in July, slightly up from the 1.9%

in June. The y/y CPI growth remains below the government's target of "around 3%"

for the whole year.

     The pick up in consumer inflation was supported by price gains in both food

and non-food items. Food prices gained 0.1% m/m after the 0.8% drop in June,

picking up 0.5% y/y, compared with the 0.3% gain in June.

     Pork was the biggest contributor to higher food prices, as swine fever saw

falling supply and increased tariffs on U.S. soybeans lead to higher prices of

pig feed. Vegetable prices edged up by 1.7 m/m and 3.8% y/y, respectively, due

to July's extreme weather conditions.

     Non-food prices, increased by 0.3% m/m from the 0.1% m/m hike in June and

accelerated to 2.4% from 2.2% y/y.

     --GAINERS

     Almost all non-food categories saw price increases both m/m and y/y in

July, although garment prices declined 0.4% y/y. Healthcare costs headed

gainers, up 4.6% y/y, followed by 3% gain in transportation and 2.4% rise in

housing costs. Education and entertainment price grew fastest m/m, up 1.5% in

July, with other categories such as transportation, healthcare, housing, other

necessities and services rose within the range of 0.1%-0.3%.

     Core CPI growth, which excludes prices of food and energy, accelerated to

0.3% from 0.1%. The relatively small growth shows China's consumer inflation is

still in an upward trend.

     As CPI sits within the government's comfort zone, it is unlikely there will

be any short term change in the government economic policies or the central

bank's monetary policy, with policy expected to continue focusing on bolstering

economic growth.

--MNI Beijing Bureau; +86 (10) 8532-5998; email: iris.ouyang@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: MAQDS$,M$A$$$,M$Q$$$]