China released most of its August economic data today. The real economy continues to decelerate but at a pace more modest than market expectations. CPI inflation continues to rise and will likely generate some pressure for deposit rate increases.

IP growth surprised on the upside, accelerating to 13.9% yoy (vs market consensus of 13%) in August compared with 13.4% in July. This is achieved despite the government efforts to cut production in the energy intensive sectors. The spokesperson from the Statistical Bureau highlighted that this relatively strong IP performance reflected mainly the strength of demand for the equipment sector and light manufacturing (i.e., demand for consumer goods). We do expect next 1-2 months’ IP growth to decline to probably 12%yoy, as the mandatory power cuts by many local governments will have a more visible impact on production. Nevertheless, we see a modest upside risk to our current yoy GDP growth forecasts of 8.9% in Q3 and 8.1% in Q4.

Export growth, which was reported yesterday, showed deceleration to 34.5% yoy in Aug (from 38% in Jul) but the slowdown was not as sharp as expected.

Ytd FAI growth moderated slightly to 24.8% yoy in Jan-Aug from 24.9% in Jan-July, but again the pace of deceleration is quite slow. The yoy increase in the planned amount of new FAI projects dropped to 22% in Aug from 29% in July, indicating that the actual FAI deceleration will continue in coming months. Property investment growth remained largely unchanged at 34% yoy in August but should slow in coming months following a few months of weaker property sales (despite the recovery in weekly volume last month, the currently transaction volume remains about 40% lower than the April peak).

Retail sales growth rose to 18.4% yoy in Aug, up from 18% in Jul. Stripping out retail price inflation, the retail volume growth is largely unchanged.

CPI inflation rose to 3.5% yoy in August from 3.3% in July, in line with market expectations. The acceleration is mainly driven by food inflation, especially vegetable, pork and egg prices in the past months. Nevertheless, we think the underlying inflationary pressure is stronger than what the official figures are suggesting. Note that the agriculture price index rose a cumulative 9.5% mom in July and August, and historically the pass-through from agriculture prices to the food component of CPI was about 60%, but this time the food component of CPI rose by only 30% of the agriculture price increase over the past two months. If there will be some normalization of this pass-through rate, September’s yoy CPI inflation should continue to rise a bit to around 3.7%, though the daily agriculture price index began to decline from the beginning of this month.

New lending came in at RMB540bn, and yoy PPI inflation rose a bit to 4.6% in August, both broadly in line with consensus estimates.

Overall, we think these data points can help marginally ease the concern on the potential of a sharp economic slowdown, but also suggest that that the pressure for allowing deposit rate increases will intensify. The public discontent with real negative interest rates (with CPI inflation now at 3.5% while the one-year benchmark deposit rate at 2.25%) tends to increase, and recent media reports that bank profits accounted for about 50% of total A share listco profits in H1 this year also raise the question of whether the “profit distribution” between banks and the rest of economy is fair. These will translate into pressures for the government to consider deposit rate liberalization (which will likely result in an increase in deposit rates given the competition) or an asymmetric rate hike (i.e. hiking deposit rates but not lending rates). Either option will result in some NIM contractions for banks, especially smaller banks.

• [Editor:editor]