China's factory inflation slowest in 13 months as war on pollution steps up

By Stella Qiu and Elias Glenn

BEIJING (Reuters) - China's producer prices rose at their slowest pace in 13 months in December, as the government's war against winter smog dented factory demand for raw materials in a sign the world's second largest economy has started to slow.

The producer price index (PPI) rose 4.9 percent in December from a year earlier, the slowest growth since November 2016, the National Bureau of Statistics (NBS) said on Wednesday. That was slightly faster than the 4.8 percent in a Reuters poll of analyst but much weaker than the 5.8 percent pace seen in November.

The data also showed consumer inflation accelerating less than expected and remaining well within the central bank's comfort zone.

Analysts say the year-on-year slowdown in producer price inflation was due in part to a high base last year with price gains in raw materials falling from their peaks. It also supports the view that a softening in the economy has started in the last few months.

"Looking ahead, we think that food prices aside, inflation will continue to drop back in the coming quarters as economic activity softens," Julian Evans-Pritchard, Senior China Economist at Capital Economics, wrote in a note.

The data shows producer price increases slowing for the second month in a row in December, which follows a modest recovery in prices seen in the third quarter of last year.

A government crackdown on smog in the heavily industrialised northern provinces this year has hit demand for raw materials and continued curbs on the housing market have weighed on property investment.

While pollution curbs have had a disinflationary effect on producer prices, the resulting supply disruptions have in some segments added upward pressure to prices.

On a month-on-month basis, the PPI rose 0.8 percent in December, beating November's 0.5 percent increase, due to temporary disruptions caused by the pollution curbs.

The production restrictions at factories have triggered fears of supply shortages, giving a major boost to iron ore and steel futures prices and helping to offset tepid demand during winter months as construction activities slow.

"We'll have to see whether those price gains will be passed onto consumers in 2018," said Liu Xuezhi, an analyst with Bank of Communications.

Raw material prices rose 8.1 percent in December year-on-year, slowing from the 9.7 percent increase in November, data from the statistics bureau showed.

China's industrial firms reported seven-month low earnings for November as demand and producer price gains eased, adding more pressure on companies saddled with debt.

In December, consumer inflation accelerated less than expected to 1.8 percent from a year earlier versus 1.7 percent in November. The consumer price index (CPI) had been expected to edge up to 1.9 percent.

The food price index declined 0.4 percent in December after falling 1.1 percent in November. Non-food prices rose 2.4 percent, compared with 2.5 percent in November.

Core inflation, which strips out volatile food and energy prices, slowed to 2.2 percent from 2.3 percent a month earlier.

For 2017, CPI rose 1.6 percent, well within Beijing's annual target of 3 percent, while PPI surged 6.3 percent, ending a falling streak over the past five years.

"It's unlikely that CPI this year will surpass the government's comfort zone of 3 percent. I expect the central bank will stay put, under no pressure of resorting to monetary policy to contain modest inflation," Bank of Communications' Liu said.

China's economy is expected to have posted growth of 6.8 percent in 2017, up slightly from the previous year, supported by a construction boom and robust exports.

(Additional reporting by Lusha Zhang in Beijing; Editing by Sam Holmes)