China August CPI seen rebounding, trade surplus widens on weak imports

If headline CPI rises as expected, it would alleviate immediate deflation worries but not change the overall policy outlook, since the increase is seen as a base effect from food costs rather than a real demand pickup. A weaker-than-expected reading, similar to July's undershoot, would raise doubts about the sustainability of consumer spending and push policymakers toward more stimulus. PPI draws more attention from traders focused on industrial demand. A stronger number would back the view that factory deflation is fading, though the pass-through to consumer prices stays limited. The yuan is the most directly exposed currency to the data, while the Australian dollar has some indirect sensitivity as a proxy for China's growth. However, the market reaction in both is likely to be mild since the figures are already priced in.

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Economists see China's inflation measures strengthening in August, but the uptick is attributed to a base effect from food prices rather than a real shift in demand.

Summary:

• August CPI is expected to climb to about 0.9% year on year, from July's 0.5% five-month low, driven by a recovery in pork and vegetable prices
• August PPI is predicted to improve to roughly 3.2% year on year, extending the slow easing of factory-gate deflation
• The data follows a day after customs figures showed August exports up 25% y/y, matching forecasts and accelerating from July's 23.9% pace
• Imports increased 28.2% y/y, quicker than July but below the 30% consensus, with the trade surplus widening to $119.1 billion
• The NBS manufacturing PMI rose to 49.8 in August, remaining below the 50 expansion threshold but with output and new orders returning to growth
• The NBS non-manufacturing PMI stayed flat at 49.0, weakened by a construction slowdown partly blamed on weather

The National Bureau of Statistics is scheduled to publish August inflation figures. Economists forecast a rebound in the headline CPI to about 0.9% year on year, versus July's five-month low of 0.5% that fell short of predictions. The expected rise is mainly due to higher food prices, especially pork and vegetables, and firmer refined oil prices, not a widespread improvement in consumer demand.

Producer prices are expected to rise to about 3.2% year on year, continuing the slow easing of factory deflation. Economists' forward projections show headline inflation near 1% in September, then falling back to around 0.8% in October, indicating the current rebound is seen as temporary rather than a lasting change in the inflation trajectory.

The inflation data arrives a day after customs figures showed a familiar split in China's trade. Exports in August increased 25% year on year, matching forecasts and accelerating from July's 23.9%, supported by strong overseas demand for autos and high-tech goods like semiconductors. Imports rose 28.2% year on year, quicker than July but below the 30% consensus, a gap economists see as evidence of still-weak domestic demand despite robust headline growth. The divergence widened the trade surplus to $119.1 billion, from $112.5 billion in July.

The contrast between strong exports and weaker imports has also been visible in PMI data. The official NBS manufacturing PMI improved to 49.8 in August from 49.2, still below the 50 expansion threshold for a second month, but with improvements in output and new orders, both returning to growth, and new export orders also rising. Employment remained the weakest factor. The private RatingDog manufacturing index, which focuses on smaller export-oriented firms, continued to show strength, rising to 51.5 from 50.9 and extending a new-orders growth streak to 15 months. In contrast, the NBS non-manufacturing PMI covering services and construction stayed flat at 49.0, with the government attributing part of the construction weakness to bad weather.

Overall, the trade and PMI data support the expectation that the upcoming inflation figures will show an economy where external demand leads, while domestic consumption and services remain weak. This split keeps pressure on Beijing to implement more measures to stimulate household spending, even as exports continue to be the main driver of headline growth.

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