Cooling prices point to more stimulus for China

November 10, 2015, 9:26am

By Xiaoyi Shao and Nathaniel Taplin, Business Day Live. Photo Thinkstock

BEIJING/SHANGHAI — China’s October inflation data showed persisting if not intensifying deflationary pressure, spurring analysts to expect more moves to stimulate the slowing economy by year-end.

The October consumer price index (CPI) cooled more than expected, rising 1.3% from a year earlier, compared with 1.6% in September, National Bureau of Statistics (NBS) data showed on Tuesday. A Reuters poll expected a 1.5% rise.

The producer price index (PPI) fell 5.9% in October from a year earlier, equal to the September decline and slightly worse than economists’ forecasts of a 5.8% drop.

On a monthly basis, consumer prices fell 0.3%, compared with a 0.1% increase in September.

Analysts agreed the weak inflation readings raised the odds of further stimulus soon, but were divided on whether that meant further rate cuts, greater fiscal outlays or both.

"While it is rational to argue China should ease monetary policy further, China appears to intend to stimulate demand via more proactive fiscal policy," Commerzbank’s senior emerging markets economist, Zhou Hao, wrote.

"(A) further cut in policy rates before the end of this year might be difficult especially as (the) Fed is about to hike. The recent statement by deputy minister also indicates that China will do more on fiscal side in the coming year."

On Friday, Caixin Magazine quoted China’s vice-minister of finance indicating a fiscal deficit of 3%, well above the current planned 2.3% for 2015, might still be considered within a safe range.

China is already in its biggest easing cycle since the height of the financial crisis, but low inflation means that real interest rates remain high for many firms, especially manufacturers who have endured years of falling factory gate prices.

The central bank has cut benchmark interest six times since November 2014 and repeatedly reduced banks’ reserve requirement ratio.

Tuesday’s weak inflation print continues a well-established trend of falling producer prices and tepid consumer price rises, in part a result of sharply lower commodity prices in 2015 but also reflecting slowing demand growth for many goods.

Problem of overcapacity

"The PPI data continued to point out weak domestic demand and the overcapacity problem in the real economy," Shenyin Wanguo Securities economist Li Huiyong said.

"We think the government needs to step in to intervene with more support as the outlook of the economy is not so optimistic. We expect more interest rates and RRR (reserve requirement ratio) cuts in coming months."

Heavy industrial firms and miners, hit by an extended slump in the property sector, which drives final demand for many of their products, have fared particularly poorly.

The Luan Group, a state coal miner, said in October it had no choice but to cut output and put workers on extended unpaid leave.

Although consumer price inflation in China is highly seasonal due to the outsize index weight of food prices, economists also highlighted weakening sequential momentum as a concern.

The monthly fall in CPI indicates "the momentum of consumer price rises is petering out", wrote Li-Gang Liu and Louis Lam, economists at ANZ in Hong Kong, adding that deflationary pressure had "intensified".

October trade figures widely missed forecasts, with exports falling 6.9% and imports tumbling 18.8%.