MNI DATA ANALYSIS: China "One Step Away" From PPI Deflation

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

more than two years in January, underlining the economies sluggish start to

2019, increasing calls on policymakers to roll out measures to ease financial

pressure on industrial firms as factory deflation looms.

     Consumer prices held steady over the month, partly helped by easing food

inflation. 

     Producers price index (PPI) rose just 0.1% in January over a year ago,

decelerating from the 0.9% gain seen in December according to data released by

the National Bureau of Statistics (NBS) on Friday. It was the lowest level since

September 2016 and below the 0.3% projected in an MNI survey of economists.

     --PPI DEFLATION

     China is now only "one step away from PPI deflation," Deng Haiqing, the

chief economist of Wallstreet.CN wrote in a report Friday. 

     With crude oil prices having bottomed out in January and commodity prices

picking up, PPI is likely to stay positive in short-term, assuming industrial

product prices do not fall sharply in the next three months, Deng said.

     But still, "PPI deflation will be hard to avoid this year," he added.

     With factory gate deflation likely to deepen in the coming months,

policymakers will likely take easing measures to help cash-strapped

manufacturers, including cuts to benchmark lending rates, a note sent by Capital

Economics suggests.

     On a monthly basis, PPI fell 0.6% after contracting 1.0% in December.

Ex-factory prices were mainly dragged down by lower production material prices,

which fell 0.8% from December, contributing to 0.57 percentage point to the

overall PPI m/m.

     There was less of an impact on the petrochemical industry, as crude oil

prices rebounded. Ex-factory prices in oil and gas exploration, processing of

oil, coal and other fuel, chemical products manufacturing fell 6.1%, 4.5%, and

1.5% respectively from December, all contracting at a slower pace, compared to

last month's drop of 12.9%, 7.6% and 1.9%.

     Falling producer prices remain a concern which will further erode profit

growth across industry moving forward.

     --CPI BELOW 2%

     The Consumer price index (CPI) rose 1.7% y/y in January, down from 1.9% in

December, registering the smallest gain since November 2017. An MNI survey of

economists had projected a gain of 1.8%. 

     The lower than expected CPI reading in January was mainly driven by the

decrease in food price inflation.

     On month, CPI stood at +0.5% in January, compared with an unchanged reading

in December. Food prices rose 1.6% m/m, extending the 1.1% gain in December. The

January reading surprised to the downside, coming in below the recent average

January pre-New Year holiday reading. 

     In the past three years (2016 to 2018), food inflation in January gained

more than 2% ahead of the Chinese New Year holiday, Deng pointed out.

     Prices of non-food items rose 0.2% m/m, reversing the 0.2% decline seen in

December. A seasonal pickup in travel costs ahead of the holiday, including a

growth of 15.9% m/m in airplane tickets and 2.8% in bus fees, has propped up the

overall CPI by 0.15 percentage point, the NBS said.

     Gains were offset by weaker fuel costs. Gasoline and diesel prices fell by

3.7% and 4.0% m/m, respectively. Fuel prices, controlled by the government, were

set lower following the previously declining world crude prices.

     "CPI may further decelerate, and it is unlikely for the CPI to exceed 2%

for the whole year," Wallstreet.CN's Deng said.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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

[TOPICS: MAQDS$,M$A$$$,M$Q$$$]