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China’s Slowing Inflation Renews Its Slowdown Concerns

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China’s inflation measures slow down

While the markets have remained in the green for the last few days, they are getting spooked on renewed China slowdown fears. The latest data out of China (FXI) that’s fueling these fears is inflation data. According to the National Bureau of Statistics data released on January 10, China’s consumer price index (or CPI) slowed to 1.9% in December YoY from 2.2% in November. The December growth was also the slowest growth in six months. The producer price index (or PPI) also slowed significantly to 0.9% from 2.7% YoY in November. December’s PPI grew at the slowest clip in two years. Both these measures came in below market expectations.

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China’s renewed slowdown concerns

Along with lower energy prices (XLE), the prices of industrial inputs and final consumption goods declined, leading to slowing inflation. The slowdown in producer inflation indicates weak domestic demand and could also lead to a further dent in corporate profits. The weaker inflation is also reflected in the drop in China’s industrial profits. The data showed the first contraction in profits for industrial companies since December 2015. Chinese equity markets (BABA) (BIDU) fell almost 25% in 2018 as compared to the S&P 500’s (SPY) drop of 6.3%.

Strong measures are needed

The data points signal that China’s slowdown is deepening. China might need more broad-based policies to weather the weakness. The country has already announced it will cut the reserve requirement ratio by a total of 100 basis points in January. China would likely benefit from resolving its trade differences with the US (DIA) (VTI) sooner rather than later to get its economy back on track.

To learn how the trade war is impacting China, read Why China Needs More Than a Trade War Truce to Buck the Slowdown.

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