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China's inflation remained subdued as we approach the end of 2024. The CPI edged down further, declining from 0.2% YoY in November to 0.1% in December. The retrenchment was largely driven by falling food prices, especially a double-digit decline in beef. Lower energy prices also dragged the transportation and communication CPI down by 2.2%. On a brighter note, the core CPI, which excludes food and energy, picked up from 0.1% YoY in September to 0.4% in December. This suggested consumer sentiment saw some signs of stabilization as the impact of recent stimulus policies started to unfold. Meanwhile, the PPI registered the 27th consecutive contraction of -2.3% as overcapacity lingers.
The persistently weak inflation has prompted the People's Bank of China (PBOC) to stay on an easing stance. We expect there will be a 50-bps cut 1-year Loan Prime Rate (LPR) this year, in tandem with balance sheet expansion. The recent collapse in Chinese government bond (CGB) yields is pricing in such developments. However, we think the near-term downside risk could be limited. Investors may take profits at these levels and wait for the release of fiscal policy details. Note that both 2-year and 10-year CGB yields have already fallen to record lows of 1.10% and 1.60% levels respectively. Curve-wise, flattening is at play amid a prolonged easing bias as we expected. The 2/10Y segment have already fell from the peak of 76bps to 48bps of late.
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