MNI Analysis: China at Risk of Deflation as PPI Hits 2-Yr Low

     BEIJING (MNI) - China's factory-gate prices grew at the slowest pace in

more than two years, suggesting slower demand discouraging industrial

production. That has raised calls for policymakers to take easing measures and

prevent the economy from entering deflation. Consumer prices held steady partly

on weak spending.  

     Producers price index (PPI) gained 0.9% in December over a year ago,

according to data released by the National Bureau of Statistics on Thursday.

That would be the lowest level since September 2016, below 1.6% projected in an

MNI survey of economists, and contrasted sharply with November's 2.7% rise y/y.

     "PPI is likely to continue to decline," Deng Haiqing, the chief economist

of Wallstreet CN wrote in a report. If it turns into deflation, the central bank

may consider interest rate cuts, a significant easing of monetary policy, and

increase countercyclical adjustment, he said.

     PPI y/y growth may turn negative by the first quarter, Bocom International

said in a report. 

     On a monthly basis, PPI decelerated by 1% after contracting 0.2% in

November. The biggest drag on prices is driven by smaller gain in production

material prices, which fell 1.3% from November, contributing to 0.96 percentage

point to the overall PPI m/m.

     The cost of fuel and power, chemical raw material, ferrous metal,

non-ferrous metal and wire declined from November by 2.4%, 1.9%, 1.3%, and 0.5%,

respectively. The exceptions are the procurement price of construction material

and non-metal, which rose 1.2% m/m. 

     --NEGATIVE PROFITS

     The petrochemical industry suffered the most from weak commodity prices.

Oil and gas exploration, processing of coal and other fuel, chemical products

manufacturing fell 12.9%, 7.6%, and 1.9% from November, respectively. Fuel

prices, controlled by the government, were set lower following declining world

crude prices. 

     The broadly falling prices of industrial products may indicate slowing

growth in companies' profits or even negative growth, Bocom said in a report. 

     Consumer price index (CPI) rose 1.9% y/y in December, down from 2.2% in the

previous month, missing the projection of 2.1% by the MNI survey. It was also

the smallest gain since June 2018.

     CPI m/m was flat in December, compared with 0.3% m/m decrease in November.

     Food prices rose 1.1% m/m compared with -1.2% m/m in November from October.

The prices of vegetables and fruit increased by 3.7% and 1.9%, respectively as

cold weather disrupted supply.

     --SOFT DEMAND

     Prices of non-food items fell 0.2% m/m, extending -0.1% in November, as

costs of vehicle fuels dropped following a slump in global crude prices, but

also indicate a broadly softening consumer demand. 

     The price of gasoline and diesel oil fell by 10.1% and 10.8%, respectively,

dragging down the CPI by 0.22 percentage point.

     Inflation in 2018 rose 2.1%, well below the government's 3% ceiling, and

leaving the central bank with plenty of room to continue pursuing loosening

policies.

--MNI Beijing Bureau; +86 (10) 8532-5998; email: wanxia.lin@marketnews.com

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

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