Sluggish China price growth adds to easing pressure

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Chinese consumer prices rose at their slowest pace in five years in November, another sign of weakening growth that is likely to add to pressure on the government to take further easing steps.

The consumer price index rose by 1.4 per cent last month on an annual basis, the lowest reading since November 2009 and down from 1.6 per cent in October.

Producer prices fell in absolute terms for the 33rd straight month, dented by the fall in global energy and commodity prices. The producer price index, a gauge of prices at the factory gate, slid 2.7 per cent, the sharpest drop since June 2013.

“Falling inflationary pressure should give the government more room to carry out easing measures. As inflation will most likely remain weak, the PBoC could even target lower interbank rates,” Lu Ting, chief China economist at Bank of America Merrill Lynch, wrote on Tuesday.

The People’s Bank of China cut benchmark interest rates late last month. Mr Lu forecasts another rate cut in the first half of next year along with three cuts in banks’ required reserve ratio during 2015.

Producer prices, already battered by a slowing economy that has softened demand for basic materials such as steel, cement and chemicals, have come under additional pressure from falling prices for oil and other commodities.

Falling producer prices are a special worry for policy makers because of the huge rise in Chinese corporate debt since the 2008 global financial crisis. Falling prices raise the burden of repaying existing debt that is fixed in nominal terms.

Chinese worries over deflation have placed the PBoC in a similar position to central banks in the EU and Japan, which are also struggling to combat stubbornly low inflation or outright deflation.

Some market participants have worried that China will respond to weak inflation in part by weakening its currency. The renminbi has slid sharply in recent days, recording its biggest one-day fall against the dollar since 2008 on Monday.

But most analysts say the PBoC is unlikely actively to drive the renminbi weaker, a move that would risk triggering capital flight. The central bank has set its daily fixing for the currency stronger in recent days, signalling it will not allow the currency to fall too far.

Still, with China’s economic growth on a long-term slowing trend, commodity prices falling and industrial overcapacity stubbornly persistent, the spectre of deflation will loom over China for the foreseeable future.

“In the near future, the PBoC will likely remain at the forefront of the global central banks’ battle against ‘low-flation’,” Morgan Stanley economists led by Helen Qiao wrote on Monday.

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