China braces for tighter monetary policy amid 2% inflation in January

Slower loan growth also foreseen.

According to Barclays Research, China's January saw the expected easing in y/y CPI inflation and PPI deflation, to 2% and -1.6%, respectively, from 2.5% and -1.9% in December. Holiday effects pushed  lower the y/y CPI but m/m CPI rose to 1% (though this should be expected), with meat and vegetable prices contributing 60% of the increase. The m/m PPI rate also rose by 0.2% on rising commodity prices. 

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We expect a jump in CPI inflation in February, and also look for it to reach 3% in Q3 and 4% in Q4. We maintain our full-year forecast of 3.2% (2012: 2.7%). 

On the other hand, our growth and inflation profiles suggest the risk of monetary tightening in the form of interest rate hikes in H2 remains low. We do expect some tightening of shadow banking activities and stricter regulation on local government financing this year and slower new loan growth in the coming months.