China factory deflation deepens in September

Bloomberg Beijing | Updated on October 15, 2019


China’s factory deflation deepened in September due to slowing output growth and falling raw material prices, adding to signs that Chinas domestic slowdown is an increasing drag on the struggling world economy.

The producer price index fell 1.2% from a year earlier, as forecast by economists in a Bloomberg survey. Surging pork prices drove consumer inflation higher, cutting into household spending power.

Weak import data

China’s producer price deflation is acting as a brake on the global price outlook just as central banks step up easing in an attempt to put a floor under slowing world expansion. Weak import data reported on Monday had already added to the gloom over the global outlook, which is worsening amid the uncertainty caused by the US-China dispute.

Growth momentum is definitely weak as indicated by the persistently declining PPI, said Raymond Yeung, chief Greater China economist at Australia & New Zealand Banking Group Ltd in Hong Kong. The industrial recession is not only caused by the trade war but also a lack of domestic drivers.

The consumer price index rose 3% year-on-year, the fastest since 2013. That was driven by food prices climbing 11.2% and the more than 69% jump in pork prices, according to the National Bureau of Statistics. Consumer inflation excluding food and energy remained stable at 1.5%.

Its economy is facing rising downward pressures and economic difficulties are prominent, Premier Li Keqiang said in a meeting with local government leaders, according to state television broadcaster CCTV on Monday. The proper use of counter-cyclical tools is needed to support growth, Li said, as he called for expanding effective investment and seeking new areas of consumption growth.

Chinese policy makers are facing a rising divergence in inflation, with surging food prices pushing up what consumers pay, while deflation has returned to the industrial sector, hurting profits and making debt repayment more difficult. The PBOC has increased liquidity supply to banks but has refrained from cutting benchmark interest rates so far.

Credit data due this week will show if the recent stimulus is actually helping boost lending, while data due Friday is forecast to show economic growth continued to slow in the third quarter.

With CPI rising 3%, a tentative trade war truce agreed Friday, and policy makers desire to to curb debt and financial risks, there may be only a measured dose of stimulus, according to Michelle Lam, greater China economist at Societe Generale SA in Hong Kong.

Investment drag

The return to PPI deflation since July is not only acting as a drag on manufacturing investment, already under stress from US-China trade tensions and supply chain relocation, but also poses a major risk for onshore corporate debt refinancing, Bo Zhuang, chief China economist at research firm TS Lombard, said before the inflation data. Sustained PPI deflation, where the monthly rate remained below -2% for more than three to six months, would be a likely catalyst for the reversion to old-style credit stimulus, he said.

The CPI will stay above 3% in coming months, and could rise to close to 4% in January when the Lunar New Year holiday falls, according to Nomuras Lu. Producer price inflation may fall even more due to weakening domestic demand, falling energy and raw material prices and the value-added tax cut that became effective in April this year, he said.

Published on October 15, 2019

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