3rd LD-Writethru-China Focus: China's March prices indicate firmer ground for recovery

China's consumer prices held steady in March, while producer prices showed signs of ending a run of negative readings, indicating the economy is heading for recovery.

The consumer price index (CPI), a main gauge of inflation, rose 2.3 percent year on year in March, unchanged from February, the National Bureau of Statistics said in a statement on Monday.

It was fractionally below expectations of 2.4 percent by Bloomberg and 2.6 percent by Nomura. The CPI remains below the government's 3-percent target for the year.

The CPI figure included a 7.6-percent rise in food prices, up from 7.3 percent year on year in February. Non-food prices, which are a better reflection of inflationary pressure, remained subdued at 1 percent.

NBS statistician Yu Qiumei attributed the rise in inflation mostly to high vegetable and pork prices.

Within the CPI food basket, pork prices jumped sharply by 28.4 percent year on year, contributing 0.64 percentage points of CPI growth, while vegetable prices skyrocketed by 35.8 percent, accounting for 0.92 percentage points of CPI growth.

Looking at the month-on-month change, CPI fell 0.4 percent, a reversal from February's 1.6-percent increase.

Since January, CPI data have been calculated using a new comparison base that takes into account new products and services, reflecting a change in consumption patterns. The adjustment slightly reduced the weight of food, which previously accounted for nearly one-third of the CPI calculation.

The producer price index, a measure of costs for goods at the factory gate, dropped 4.3 percent year on year in March, narrowing from a 4.9-percent drop in February and 5.3-percent drop in January. It beat Bloomberg's expectations for a 4.6-percent decrease.

On a month-on-month basis, the 0.5-percent PPI increase was up from February's 0.3-percent fall and was the first month-on-month rise since January 2014.

"It would be wrong to get too excited about one month's data, especially with the headline PPI reading still lodged so firmly in deflationary territory. That said, taken together with positive readings from the March PMIs, the upside surprise in factory-gate prices is another indication that China's economy is on slightly firmer ground heading into the spring," said Tom Orlik, chief Asia economist at Bloomberg.

"Resilient producer prices are an indication of more robust demand in the industrial sector. If sustained, they would also support higher profits and make China's corporate debt problem appear slightly less formidable," he added.

A CICC research note stressed increasing evidence of a recovery in investment demand after the Chinese New Year, led by faster growth of infrastructure investment and a recovery in property investment. It predicted PPI will narrow further, and corporate profitability will improve moderately in the next few months.

Given lingering downside risks to growth, from ongoing corporate restructuring to soft external demand, continued policy easing will be critical in order to sustain the recovery, said a research note by HSBC. Endi