[20081114]Comment on CPI and PPI Data in October-20081114 Shanghai Securities

Risk of Deflation will Speed up the Monetary Policy to Turn looser
--Comment on CPI and PPI Data in October
Main Viewpoints:
Three major indices kept rolling back, CPI declines slower than PPI
As the high-price order effect gradually fades away and low-price order effect emerges, the growth of CPI, PPI and Purchasing Price Index of Raw Material, Fuel and Power maintain a simultaneous roll-back in October. As the decline of consumer goods price is slower than the decline of producer goods price, we forecast the decline of CPI will remain slower than that of PPI.
The attention on inflation switched to demand slowdown caused by economic recession
The reasons of the sharp slide of the growth of PPI of this month are the continuous decline of the price of international bulk commodities such as crude oil and the demand slowdown caused by global economic recession. The anxiety to economic recession triggered by demand slowdown already began to overwhelm the optimistic mood brought by price downturn.
Loose monetary policies are expected to be unveiled as risk of deflation enlarges
In view of month-on-months growth, CPI had a stable performance but saw slight fall in recent months. We estimated China’s CPI would meet negative growth in February of 2009 and risk of deflation is gradually aggravating. Loose monetary policies in respect of reduction of interest and reserve ratio are expected to be unveiled in succession soon. Window guidance will play a more important role in terms of credit policy.