UBS cuts 2014 China CPI forecast to 2.7%

China's consumer price index slowed from 2.5 percent year-on-year growth in January to 2 percnet year-on-year in February, hitting a 13-month low, and producer price index showed a steeper decline of 2 percent year-on-year. Besides the Chinese New Year effect, the weak inflation readings are largely attributable to lower food and commodity prices.

We cut China's 2014 CPI inflation forecast from 3.0 percent to 2.7 percent due to a weaker starting point, but do not think China face full-scale deflation. We expect PPI to stabilize and register positive month-on-month growth in H2 2014, but average -0.6% for the whole of 2014, a smaller contraction compared with 2013 (1.9%).

CPI inflation was mainly dragged down by lower food prices

While February CPI was affected by the earlier arrival of the Chinese New Year, food inflation in the January-February period was much weaker than usual. Contrary to the usual seasonal pattern around the Chinese New Year, pork prices declined by 1 percent month-on-month in January and 3 percent month-on-month in February. The drop in pork prices contributed 0.3 percentage point to 0.5 percentage point drop in headline CPI growth since December (Figure 1), while the rest mainly came from lower prices in other food items such as grain and fresh vegetables. The former has been helped by the increased share of large-scale hog farming in the past couple of years which has made the usual hog cycle very mild. The latter has been helped by good harvest and mild winter weather. Prices of non-food items, which are about 70 percent of the consumption basket, have remained stable in the past two years (Figure 2), averaging at around 1.6 percent year-on-year.

Top 10 figures in 2014 govt work report

Experts: GDP growth target reasonable