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 With the economy sputtering after years of double-digit growth,
analysts predict Chinese consumer prices are unlikely to pick up
significantly in the near future due to crumbling commodity and
energy prices, overcapacity and weak demand.
The data has increased calls from some economists for more stimulus
and interest rate cuts to spur growth and prices, even though the
November consumer price index (CPI) surprised on the upside, rising
1.5 percent on-year from 1.3 percent in October. A Reuters poll had
tipped a 1.4 percent rise.
"With corporate confidence already at a six-year low, persistent
deflation might also put the economy at risk of a downward spiral,"
said HSBC economists in a note to clients.
"More aggressive policy easing still holds the key to stabilize
growth in the coming months."
Wednesday's release from the National Bureau of Statistics (NBS)
also showed factories were plagued by producer price deflation, with
the producer price index (PPI) down 5.9 percent in November from a
year earlier, in line with expectations and flat from October's
drop.
It marked the 45th straight month of declines in the index.
NSBO economists in Beijing estimated that inflation-adjusted lending
rates are as high as 10.7 percent when calculated using PPI, seen as
inhibiting fresh investment.
On a monthly basis, consumer prices were flat, compared with a 0.3
percent fall in October.
'LOST DECADE' CONCERNS
While entrenched PPI deflation is hurting companies, economists are
more concerned about falling consumer inflation, fearing that if
prices slip further, China may face a Japanese-style 'lost decade'.
"China has entered a deflationary era," Liu Li-Gang and Louis Lam,
economists at ANZ, wrote in a research note.
"More alarmingly, the GDP deflator, a broader measure of price
changes in the economy, declined 0.7 percent y/y in Q3, indicating
that China has entered a deflationary era."
The risk that Chinese consumption might sink is not only a major
risk for domestic policy makers but also for foreign firms who have
invested heavily on the assumption that Chinese spending would help
offset weak demand elsewhere. There are already signs that China is
slowing its purchases of imported wine, which looks to hit profits
at wine importers like ASC Fine Wines, owned by Japan's Suntory
Group.
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While official retail sales figures have been a rare bright spot in
a faltering economy, private sector surveys have shown consumer
sentiment plumbing record lows in recent months.
Chinese manufacturing has been stagnating for more than three years,
with wholesale prices sliding continuously as legions of small
companies compete desperately to stay above water.
November trade data on Tuesday and the recent official Purchasing
Managers' Index (PMI) also underscored the persistent slack in the
economy.
In a bid to avert a sharper economic slowdown, China's central bank
has already cut interest rates six times since last November and
reduced the amount of cash that banks must set aside as reserves.
The government has also eased restrictions on home buying to boost
the sluggish property market and is trying to ramp up infrastructure
spending.
Economic growth dipped to 6.9 percent in the third quarter,
according to official statistics, dropping below the 7 percent mark
for the first time since the global financial crisis.
HSBC expects both consumer and producer prices to head lower and
forecast another 50-basis point policy rate cut and 400-bps reserve
ratio cut in 2016.
(Reporting By Josephine Mason and Sue-Lin Wong in BEIJING and Pete
Sweeney, Ruby Lian and Samuel Shen in SHANGHAI; Writing by Nathaniel
Taplin; Editing by Kim Coghill)
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