China Economy:Market rout threatens to bring more deflation pressure

Fundamentals.

    CPI inflation rose by 1.4% YoY forJune from 1.2% YoY for May,slightly higher than 1.3% estimatedby the Bloomberg consensus. It wasmostly driven by food prices, whichwere up 1.9% YoY. Due to the rainstorms and flooding in southernprovinces, fresh vegetable pricesjumped by 11.4% YoY for the month.

    Pork prices also rose by 3.6% YoY.

    Meanwhile, a 13.7% YoY drop in fuelprices continued to weigh on nonfoodprices, which were up just 1.2%YoY for June. PPI dropped further to-4.8% YoY for June from -4.6% YoYfor May. Major sub-sectorscontinued to experience sharpdeclines. PPI for mining was down18.5% YoY for June, while that foroil refining dropped by 18.8% YoY.

    For 1H15, CPI inflation was runningat 1.3% YoY, below the 3.0% officialtarget. Going into 2H15, we believethe price challenge will be moreserious. Monetary policy has notbeen able to inflate the economy.

    Instead, the government has takenthe risk of drumming up the stockmarket