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 While much of the decline was due to falling prices for food, fuel
and other commodities, which are benefiting consumers globally, the
data also pointed to broad weakness in the world's second-largest
economy.
Facing mounting risks to growth and rising risks of deflation,
Beijing is widely expected to continue rolling out a steady stream
of stimulus measures in coming months, though most economists
believe it will hold off on more aggressive action such an interest
rate cut unless conditions sharply deteriorate.
"Policymakers in Beijing should begin to be concerned that global
disinflationary pressures are spreading to China," said Dariusz
Kowalczyk, senior economist at Credit Agricole CIB in Hong Kong.
"The low inflation readings will open the door to further targeted
monetary and fiscal easing. There is also less need for a strong
currency to offset imported inflation."
The consumer price index (CPI) rose 1.6 percent in September from a
year earlier, the National Bureau of Statistics said on Wednesday,
missing market expectations for a 1.7 percent rise and down from 2
percent in August.
The reading was the lowest since January 2010, and was also partly
due to a relatively higher base of comparison a year ago, officials
said.
Inflation is also easing in other parts of Asia from India to South
Korea, where the economy is also sputtering and facing growing fears
of deflation.
But price softness in China was not all down to food and fuel. Its
data also showed further downward pressure from the cooling housing
market, which economists say is the biggest single risk facing
China's economy.
The CPI rose 0.5 percent in September from the previous month,
versus a 0.4 percent gain expected by economists.
"The low inflation readings suggest rising risks of deflation in
China due to weak domestic demand. It confirms our view that risks
to growth are still on the downside, and further policy easing
measures are needed," HSBC economists said.
With inflation well below the official annual target of 3.5 percent,
Chinese policymakers have ample scope to announce more stimulus, on
top of a flurry of steps earlier in the year.
But as neighboring Japan and many Western countries have found,
simply injecting a mountain of money into the system may have
limited impact on the real economy if demand is too weak to absorb
it and banks remain reluctant to lend.
Further attempts by the central bank on Tuesday to keep market
interest rates relatively low also suggest authorities may be
content to take a more measured response for now while they wait to
see if activity picks up.
Late last month, China cut mortgage rates and downpayment levels for
some home buyers for the first time since the 2008/09 global
financial crisis, in one of its biggest support moves this year.
Still, some economists believe the chances of bolder policy action
are rising.
"Easing gains (in) non-food prices and the worsening PPI provide
more evidence of a weakening economy, which means the problems of
weak domestic demand and over capacity are more severe than
expected," said Li Huiyong, an economist at Shenyin & Wanguo
Securities in Shanghai.
"We expect policymakers will take more measures to stabilize the
economy. The possibility of an interest rate cut is increasing in
the coming months."
Highlighting the increasing strains on companies in China, the
producer price index (PPI) fell 1.8 percent, its 31st consecutive
monthly decline, dragged by lower oil and steel prices. The market
had expected a 1.6 percent fall in producer prices after a drop of
1.2 percent in August.
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Weakening demand is not only curbing companies' pricing power and
cutting into their profit margins but putting increasing strains on
their balance sheets and ability to pay back debts, posing a growing
threat to other companies they deal with and ultimately the banking
system.
Chinese companies have issued a steady stream of profit warnings in
recent weeks, with many reporting slowing sales. Some said they were
postponing or cutting back on planned expansions at home and
overseas, and were more reluctant to grant credit to customers.
Major construction machinery maker Zoomlion Heavy Industry Science
and Technology Co Ltd said on Tuesday it expects third-quarter net
income to fall as much as 90 percent, mostly due to slowing
investment in the real estate sector.
Zoomlion told analysts earlier this year that it had rejected some
15 percent of new orders for concrete pumps for fear customers would
not be able to pay for them, and it is now asking potential buyers
for downpayments.
The country's second-biggest steelmaker, Baoshan Iron and Steel (Baosteel),
said on Friday it will cut prices for November delivery. China's
steel demand has dropped this year for the first time in at least 14
years.
Still, top policymakers have issued a steady stream of reassurances
about the economy in recent days, citing among other things a strong
services sector and a still resilient labor market.
Premier Li Keqiang said earlier this month that China will avoid a
hard landing despite worries about the real estate market. Li also
said he was confident the economy would continue to grow at a
"medium to high tempo", forecasting growth of about 7.5 percent this
year, which appears sharply at odds with the low inflation figure.
SLOWING PROPERTY MARKET BIGGEST RISK
The latest Reuters poll showed China's economy likely grew 7.2
percent in the third quarter from a year earlier, its weakest pace
in more than five years as the property downturn weighed on demand.
Wang Jun, senior economist at China Centre for International
Economic Exchanges, a Beijing-based think tank, believes that the
central bank is more likely to cut the reserve requirement ratio (RRR)
for all of the country's banks to encourage more lending and support
growth.
"Cutting RRR in the fourth quarter is possible but it cannot be seen
as full-flown policy loosening. The possibility of cutting RRR is
far bigger than cutting interest rates, which is seen as a strong
stimulus."
Trade data on Monday showed China's export performance in September
beat forecasts, an encouraging sign for authorities as they try to
avert a sharp downturn, but domestic demand likely remained weak
despite surprisingly firm imports.
Third quarter gross domestic product along with September retail
sales, industrial output and investment data will be released on
Oct. 21.
(Reporting by Judy Hua, Shao Xiaoyi and Kevin Yao; Editing by Kim
Coghill)
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