Based on recently announced PMI figures and other indicators, we expect China to post stronger domestic demand-driven indicators this week amid mounting concerns over creeping inflation numbers and possible policy moves.

Export growth is likely to decelerate in October to 24.3 percent year-on-year (YoY), compared with 25.1 percent YoY in September.

Imports will moderate considerably, possibly by 12 percent month-on-month (MoM) to post a 28.1 percent YoY growth in October after factoring in the effects of the holiday season. As a result of a steeper slowdown in import growth, net exports are estimated to have expanded from $16.8 billion in September to $25 billion in October.

The strengthening wealth effect and the negative interest rate environment is also providing strong support for retail sales. Retail sales are expected to maintain sound growth of 18.8 percent YoY in October - unchanged from that in September - aided by robust holiday sales in high-end discretionary consumption spending.

Strong domestic demand will benefit the consumer discretionary and resources sectors. Meanwhile, the recent interest rate hike signals strong economic activity and is contributing to the expansion of banks' net interest margins (NIMs), benefiting bank earnings.

Major food prices continued to rise in October, contributing to inflation. The headline CPI may reach an annual high of 4.0 percent, up 0.6 percentage point from September, driven by rising agricultural product prices as well as a low comparative base in October 2009. In line with the steady rise in input price PMI in October, the PPI is expected to pick up further by 0.3 percentage point MoM to arrive at 4.2 percent YoY in October, reflecting the higher comparable base. Given the ongoing CPI hike, we believe there is now a greater chance of another rate hike, probably in the first quarter of 2011.

Industrial output is projected to post 13.6 percent YoY growth in October, mainly driven by robust domestic demand for industrial and consumer goods. We view that fixed asset investment (FAI) YoY growth will slightly moderate in October, translating to year-to-date growth of 24.0 percent.

FAI, underpinned by infrastructure investment increases and robust domestic demand (driven by infrastructure investment included in the stimulus package) continued to grow substantially, though at a more moderate pace.

In light of the unexpected rise in the required reserve ratio and interest rates, new loan and M2 growth likely slowed in the second half of October.

The author is an associate director and economist at CCB International Securities Ltd. The opinions expressed here are entirely his own.

(HK Edition 11/10/2010 page2)