China's factory prices have a steep fall of three years

BEIJING (Reuters) – China's factory export prices fell at their fastest pace in more than three years in September, reinforcing the case for Beijing to uncover further stimulus as production cooled on weak demand and US trade pressure.

FILE PHOTO: A customer trades in a supermarket in Handan, Hebei Province, China March 9, 2019. REUTERS / Stringer / File Photo

The Producer Price Index (PPI), considered a key barometer of the company's profitability, fell 1.2 % from the year before in September, data from the National Bureau of Statistics (NBS) showed on Tuesday. It marked the steepest decline since July 2016, but was in line with forecasts in a Reuters survey of analysts.

By contrast, China's consumer prices rose at its fastest pace in almost six years, driven most by the increase in pork prices as African swine fever ravaged the country's pig herds. However, core inflationary pressures are still modest, giving decision-makers room to introduce measures to increase demand.

"We continue to expect it to loosen over the next few quarters as demand on the demand side remains subdued and factory deflation improves," China Economist at Capital Economics Martin Lynge Rasmussen wrote in a note.

The bleak outlook is unlikely to change even as tensions in the years-long Beijing-Washington trade war have eased somewhat. US President Donald Trump said on Friday that the two sides had reached agreement on the first phase of an agreement and suspended a tariff hike, but officials said much work was still needed.

Weak prices were mainly seen in the oil and commodity sectors. PPI deflation could deepen due to weakened domestic demand, falling energy and raw material prices and value-added tax cuts that went into effect in April this year, analysts at Nomura said.

Some analysts expect China's GDP growth rate to fall below 6% in the third quarter. The government has set a growth target of 6.0% -6.5% this year.

Trade data released on Monday showed contractions in both exports and imports as US customs rates implemented on September 1 came into force, underscoring the continuing impact of the bilateral dispute.

China has taken a cautious approach to tackle the declining economy. Stimulus to date have largely avoided dramatic increases in government spending, and the central bank has also mainly used the reserve requirement for banks instead of sweeping interest rates.

Chinese central bank governor Yi Gang said in late September that there was no urgent need to implement major interest rate cuts following Beijing's repetition that it would not use "flood-like" stimulus measures.

Analysts say they expect greater stimulus measures by the end of the month, but when China's Politburo, the top decision-making political body, is expected to meet.

"Because there is very limited political autonomy with ministries, local authorities and SOEs (state corporations), the implementation of the policy must come from the above," analysts said last week in a note from Bank of America Merrill Lynch.

People's Bank of China cut a reserve ratio for banks in September, releasing $ 126 billion in loans.


Data released by NBS on Tuesday showed that China's consumer price index (CPI) rose 3% from a year earlier, higher than 2.9%, which was hiked by analysts, marking the fastest increase since October 2013, when it increased 3.2%.

While September data showed increased inflation on China's official target of around 3% and the CPI increasing by a benign 1.5%, food costs continue to rise, mainly driven by rising pork prices as African swine fever reduces the supply of pigs.

An increase in pig prices of 69.3% in September of the previous year pushed the food price index up 11.2% and increased from 10% last month. In August, pork increased by 46.7% from the previous year.

China has fought the devastating African swine fever and has implemented a number of policies to try to replenish herds, including flying in 900 breeding pigs from Denmark.

Many analysts still expect pig prices to rise higher in the coming months as the disease spreads and pig populations are cut, despite a host of public measures to increase supply to the market.

However, few expect it to have a significant impact on China's monetary policy structure for now.

"We do not think pig price-driven CPI inflation will have a significant impact on PBoC's monetary policy stance, as pig price inflation was caused by a supply shock rather than a monetary phenomenon," analysts at Nomura said.

Reporting by Yawen Chen and Gabriel Crossley; Additional reporting by Kevin Yao; Writing by Huizhong Wu; Editing by Sam Holmes

Our Standards: Thomson Reuters Trust Principles.

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