The decline in Chinese inflation last month (from 4.2% YoY to 4.1%) may have been modest but it represents the fifth consecutive month that prices' growth has slowed. Furthermore, we can be fairly confident that there is more to come, based on the base effects from last year’s sharp increase, the recent softening of food prices and the easing of domestic conditions. Food prices are still running at 9.1% YoY, but this is down sharply from the large double-digit gains seen in the middle of last year. Also of interest overnight was a further weakening in auto sales growth, up 4.6% YoY in December. Part of the explanation for weaker demand is due to the ending of subsidies but nevertheless it reaffirms that there is some moderation in consumer and business spending.
Hopes for some further policy action, either on interest rates or bank reserve requirements remains very much alive. However, at the same time, any relaxation is likely to be gradual. The slowdown in lending, especially to the property sector, was a key objective of policy last year, and thus far the measures taken have proved successful. The yuan remains modestly weaker so far this year, although it’s notable that the disparity between on-shore and off-shore rates (as wide as 2% towards the end of last year) has closed in the past few sessions.