China's falling inflation raises prospect of faster easing

By Pete Sweeney

BEIJING (Reuters) - China's inflation hit a five-year low in November, stoking expectations that Beijing will move more aggressively to head off the risk of deflation in a slowing economy, which put fresh life into soaring share markets after a reversal on Tuesday.

Consumer price inflation grew at its slowest rate in five years in November, while the producer pricing index (PPI) is already reading negative after its 33rd straight monthly decline, down 2.7 percent from a year earlier.

"The PPI deflation clearly suggests Chinese corporates are struggling amid economic slowdown," wrote ANZ economists in a research note.

"(The) real cost of funds is close to 10 percent, which will further squeeze profit margin and increase debt burden."

Investors have been calling for China to ease monetary policy since 2013 to shore up growth, and the calls have become louder as the world's second-largest economy continued to slow.

China is now heading for its weakest growth since 1990, and government insiders say GDP and inflation targets may be revised at the next economic meeting.

The central bank had held off on any big changes until Nov. 21, when it made a surprise cut to lending rates, leading economists to speculate that regulators had been alarmed by internal previews of economic data, in particular signs of deflationary risk.

That cut has been widely credited - or blamed - for setting off a speculative stock market rally that had been explosive until a sharp fallback on Tuesday.

Shares were strongly higher again on Wednesday, with the SSE Composite index storming up 3 percent in late trade, as traders judge that government will increase the flow of cash into the economy by cutting banks' reserve requirement ratios (RRR), which will allow them to lend more.

"We believe the next move will have to be a RRR cut in order to regain policy effectiveness and credibility," ANZ economists wrote.

Some are expecting a cut in RRR by year-end to recharge business confidence.

A cut to RRR could put an estimated 2.37 trillion yuan ($383 billion) of new base money into the system, an unwieldy sum to hit an economy still grappling with asset bubbles and industrial overcapacity from the last easing cycle in 2009.

Some blame China's current woes on that last round of stimulus, which they say sapped corporate competitiveness by making it too easy to load up on debt but too hard to go bust.

Before the afternoon jump on the stock markets, analysts warned that stock, forex and debt investors were wary of any signs of regulatory crackdowns aimed at stabilising markets after a few days of wild swings.

In particular, some say the China Securities Regulatory Commission (CSRC) could restrict the use of leveraging by retail and corporate investors, which media reports say has exacerbated volatility in the stock market.

On the forex markets, while accelerated easing would be negative for the value of the yuan, the spot yuan firmed against the dollar on Wednesday after dropping over 0.5 percent over the two previous days. Some traders attributed that to behind-the-scenes intervention by the PBOC to head off a destabilising slide in the exchange rate.

(Additional reporting by Kevin Yao and Jake Spring; Editing by Will Waterman)