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China's soft factory-gate inflation raises prospect of more stimulus

Reuters  |  BEIJING 

By and Kevin Yao

(Reuters) - China's prices in December rose at their slowest pace in more than two years, a worrying sign of deflationary risks that could see roll out more policy support to help stabilise the economy.

Consumer inflation for the month also eased from a year earlier due to lower non-food prices, data from the (NBS) showed on Thursday, short of market forecasts and well below Beijing's target.

Analysts say the sharper-than-expected pullback in prices raises the possibility of more stimulus measures even though China's central just reduced the ratio of cash that banks must hold as reserves in January, the fifth cut in a year.

The slowdown in domestic demand has added to the list of economic worries for China, which is mired in a trade war with the United States, its biggest trading partner.

"Slumping PPI inflation suggests corporate earnings will almost surely continue to fall in coming months," analysts at Nomura said in a note. "We expect PPI inflation to soon return to negative territory, reducing inventory stocks and exerting further downward pressure on China's growth."

The price index (PPI), a measure of the prices businesses receive for their goods and services, rose 0.9 percent in December from a year earlier - below the lowest forecast in a poll of 35 economists who had a median estimate of 1.6 percent. The index rose 2.7 percent in November.

The PPI fell a steeper 1 percent from November, its biggest fall since January 2015. November's index weakened 0.2 percent from the previous month.

Slowing inflation leaves policymakers with plenty of room to loosen policy, said in a note.

The consumer price index (CPI) rose 1.9 percent in December from a year earlier, down from 2.2 percent in November and below expectations of a 2.1 percent gain. The government's full-year target for consumer price inflation is around 3 percent.

On a month-on-month basis, the CPI was unchanged.

Xu Hongcai, deputy chief at Centre for International Economic Exchanges, a Beijing-based think tank, said he expects the central to cut reserve requirement ratio (RRR) for banks by another 2 percentage points this year.

While the chances of cutting benchmark interest rates remain low, Betty Wang, senior at Research, said such radical stimulus measures may even become possible if the weak price trend persists.

"The weakness is a signal worthy of vigilance," she said.

stocks recouped losses to edge higher as softer inflation readings raised prospects for further stimulus.

COOLING DEMAND AND PRICES

China's factory activity contracted for the first time in more than two years in December, highlighting the challenges facing as it seeks to end a bruising trade war with and reduce the risk of a sharper economic slowdown in 2019.

Domestic demand for industrial goods and services has eased in recent months as the government's multi-year campaign to curb corporate debt and risky lending practices has crimped capital spending and corporate investment.

The uncertainty created by the trade war with the is also hanging over China's economy, even though both sides have agreed to a 90-day time-out. There are concerns that the tariff war could still escalate once the truce ends, putting more pressure on Chinese authorities to bolster the economy.

Thursday's data show factory-gate prices for raw materials rose 0.8 percent last month from a year earlier, down from a 4.6 percent rise in November. Price rises in the production and processing sector slowed in December from the previous month.

Easing PPI inflation was led by and natural gas extraction, fuel processing, manufacturing, manufacturing and The five industries combined to reduce headline PPI inflation by 1.71 percentage points, according to the NBS.

The slowdown in consumer inflation was mainly due to non-food prices, as and health care prices weakened on costs and drug pricing reforms.

The in December rose 2.5 percent from a year earlier, the same as in November, while moderated to 1.7 percent from 2.1 percent.

The core consumer price index, which strips out and energy prices, rose 1.8 percent in December, in line with the level seen in November.

(Additional reporting by Beijing Monitoring Desk; Editing by Jacqueline Wong)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Thu, January 10 2019. 12:00 IST
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