China October data shows deflationary pressure persists

A customer buys vegetables at a market in Qingdao
A customer buys vegetables at a market in Qingdao, Shandong province, China, October 14, 2015. REUTERS/Stringer

November 10, 2015

By Xiaoyi Shao and Nathaniel Taplin

BEIJING/SHANGHAI (Reuters) – China’s October inflation data showed persisting if not intensifying deflationary pressure, spurring analysts to expect more moves to stimulate the slowing economy by year-end.

The October consumer price index (CPI) cooled more than expected, rising 1.3 percent from a year earlier. compared with 1.6 percent in September, National Bureau of Statistics (NBS) data showed on Tuesday. A Reuters poll expected a 1.5 percent rise.

The producer price index (PPI) fell 5.9 percent in October from a year earlier, equal to the September decline and slightly worse than economists’ forecasts of a 5.8 percent drop.

On a monthly basis, consumer prices fell 0.3 percent, compared with a 0.1 percent increase in September.

Analysts agreed the weak inflation readings raised the odds of further stimulus soon, but were divided on whether that meant further rate cuts, greater fiscal outlays or both.

“While it is rational to argue China should ease monetary policy further, China appears to intend to stimulate demand via more proactive fiscal policy,” wrote Zhou Hao, senior emerging markets economist at Commerzbank in Singapore.

“Further cut in policy rates before the end of this year might be difficult especially as Fed is about to hike. The recent statement by deputy minister also indicates that China will do more on fiscal side in the coming year.”

On Friday, Caixin Magazine quoted China’s vice minister of finance indicating a fiscal deficit of 3 percent, well above the current planned 2.3 percent for 2015, might still be considered within a safe range.

China is already in its biggest easing cycle since the height of the financial crisis, but low inflation means that real interest rates remain high for many firms, especially manufacturers who have endured years of falling factory gate prices.

The central bank has cut benchmark interest six times since November 2014 and repeatedly reduced banks’ reserve requirement ratio.

Tuesday’s weak inflation print continues a well-established trend of falling producer prices and tepid consumer price rises, in part a result of sharply lower commodity prices in 2015 but also reflecting slowing demand growth for many goods.


“The PPI data continued to point out weak domestic demand and the overcapacity problem in the real economy,” said Li Huiyong, an economist at Shenyin & Wanguo Securities in Shanghai.

“We think the government needs to step in to intervene with more support as the outlook of the economy is not so optimistic. We expect more interest rates and RRR cuts in coming months.”

Heavy industrial firms and miners, hit by an extended slump in the real estate sector which drives final demand for many of their products, have fared particularly poorly.

The Luan Group, a state coal miner, said last month it had no choice but to cut output and put workers on extended unpaid leave.

Although consumer price inflation in China is highly seasonal due to the outsize index weight of food prices , economists also highlighted weakening sequential momentum as a concern.

The monthly fall in CPI indicates “the momentum of consumer price rises is petering out,” wrote Li-Gang Liu and Louis Lam, economists at ANZ in Hong Kong, adding that deflationary pressure has “intensified”.

October trade figures widely missed forecasts, with exports falling 6.9 percent and imports tumbling 18.8 percent.

(Additional reporting by Meng Meng; Editing by Richard Borsuk)