Morgan Stanley: Chinese Inflation Is Benign, And The Hard Leading Fears Should Be over

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In a new note, Morgan Stanley’s Yuande Zhu looks at the latest data out of China and likes it:CPI inflation trended down on falling food prices and favourable carryover effect: China’s October CPI
inflation eased further, to 5.5%, largely in line with our and market expectations. The broad-based falling food prices and the favourable carryover effect help to keep the headline inflation lower. On the other hand, the upstream PPI inflation decelerated to +5% YoY, beating our forecast of +5.7% YoY and consensus expectation of +5.8% YoY by a wide margin, suggesting the upstream inflation pressures abated quickly. In turn, the deceleration in upstream inflation will help rein in further pass-through of price increases to the downstream CPI inflation over the next few months, in our view.

The resilient fundamental drivers to economic growth remained unscathed, despite the slightly
weakening activity indicators in October. Specifically, the FAI (Fixed Asset Investment) growth recovered in its sequential pace, and real retail sales growth continued to pick up, although industrial production growth moderated mildly. It appears that the concern about a sharp deterioration in growth prospects was largely overdone, in our view. 

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