China facing rise in deflation risks as inflation plunges to 5-year low
Print Edition
CHINA’S deflation risk heightened with January’s inflation growth plunging to a five-year low and approaching negative territory, the National Bureau of Statistics said yesterday.
The Consumer Price Index, the main gauge of inflation, expanded 0.8 percent year on year last month, tumbling from the pace of 1.5 percent in December. It was the weakest expansion since November 2009.
The Producer Price Index, the factory-gate measurement of inflation and a harbinger of future consumer prices, dropped 4.3 percent in January, down further from the 3.3 percent fall a month earlier.
Bureau researcher Yu Qiumei said lower food prices led the moderation in inflation growth, which was also affected by a high comparative base due to seasonal factors.
Food prices, which account for almost a third of the CPI basket, increased 1.1 percent in January, compared with the rise of 2.9 percent in December. Prices for fresh vegetables fell 0.6 percent last month as a result of warmer weather, reversing December’s rise of 7.2 percent.
The Chinese New Year holiday starts in February this year, while it was in late January of 2014, creating a high comparative base, Yu said.
Liu Ligang, chief economist at Australia & New Zealand Banking Group Ltd, said: “Notably, the CPI inflation could rebound to above 1 percent in February.” But taking into account producer prices, Liu said, the weak inflation profile suggested that “the deflation has become a risk for China, which paves the way for further monetary easing.”
Producer prices, which have remained negative for 35 consecutive months, suggest sluggish demand at both home and abroad. Low crude oil prices also helped drag down producer prices, Liu said.
In order to counter the deflation risk and capital outflows, Liu said authorities should lower the deposit rate in the first quarter, and another reserve requirement rate cut could be expected in the second quarter to allow banks to set aside less money as reserves.
The People’s Bank of China last week announced a broad cut in reserve requirement ratio by 0.5 percentage points, the first universal cut since May 2012.
Wendy Chen, an economist at Nomura, said it was “just the start of a series of further easing measures.” She said three more reserve requirement rate cuts may take place this year, while one interest rate reduction can be expected.
China’s economy grew 7.4 percent from a year earlier in 2014, the weakest annual expansion in 24 years.
A string of economic indicators, including manufacturing and trade data, indicate a continued slowdown.
The official Purchasing Managers’ Index, a gauge of operating conditions in manufacturing, fell to a 48-month low of 49.8 last month, suggesting contraction in industrial activities.
Trade also slumped 10.8 percent in January, with both exports and imports falling more than expected. Exports declined 3.2 percent, the first fall in 10 months, while imports tumbled 19.7 percent.
Lian Ping, chief economist at Bank of Communications, said policy-makers have shifted the prudent fiscal policy stance to a bias toward easing.
The State Information Center, a think tank under the National Development and Reform Commission, said in a recent report that China’s gross domestic product is expected to grow 7.1 percent this year.
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