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Deflation fears mount in China as producer prices sink the most in six years

BEIJING — China’s manufacturers slashed prices at the fastest rate in six years last month as commodity prices fell and demand cooled, signalling stubborn deflation risks in Asia’s largest economy and adding to expectations for further stimulus measures.

BEIJING — China’s manufacturers slashed prices at the fastest rate in six years last month as commodity prices fell and demand cooled, signalling stubborn deflation risks in Asia’s largest economy and adding to expectations for further stimulus measures.

The producer price index (PPI) fell 5.9 per cent last month from August last year, its 42nd consecutive month of decline and the biggest drop since the depths of the global financial crisis in 2009, National Bureau of Statistics data showed yesterday. Economists had expected a decline of 5.5 per cent after a drop of 5.4 per cent in July.

China’s stocks dropped for the first time in three days, led by commodity producers, after the PPI tumble reignited concerns about a deeper economic slowdown. The Shanghai Composite Index slid 1.4 per cent to 3,197.89 at the close, snapping a 5.3 per cent advance over two days. That weighed on sentiment across the rest of Asia, with Hong Kong’s Hang Seng Index losing 2.6 per cent, Japan’s Nikkei-225 Index shedding 2.5 per cent and Singapore’s Straits Times Index falling by 1.4 per cent.

“The change in the PPI is very worrying. It could affect corporate profitability, which in turn could affect consumption and the economy,” said Shenyin & Wanguo Securities economist Li Huiyong.

Analysts believe China’s surprise currency devaluation of nearly 2 per cent in mid-August will have little impact on inflation in the near term, in comparison with the opposite effect of sharply lower commodity prices.

Meanwhile, the consumer price index (CPI) rose 2 per cent last month from August a year earlier to a one-year high, the NBS data showed, but the gain was due largely to soaring food prices, especially the price of pork, and not an improvement in economic activity. Economists had predicted CPI would rise 1.8 per cent, compared with 1.6 per cent posted in the prior month.

Indeed, non-food inflation remained subdued at 1.1 per cent, unchanged from July.

“The risk for China is still deflation, not inflation. PPI deflation will eventually filter down to affect CPI, and aggregate demand will continue to be weak,” said Mr Kevin Lai, chief economist for Asia ex-Japan at Daiwa Securities, adding his firm had just cut its CPI forecast for next year to minus 0.5 per cent from 0.5 per cent.

“In addition, all the capital outflows will force the PBOC to continue purchasing yuan, which is hugely destructive to the monetary base,” he said.

Continuously falling producer prices are eating into profits at many Chinese firms and raising the relative burden of their debts. Official and private factory surveys last week also showed manufacturers laid off workers at a faster rate last month as their order books shrank.

The central bank has cut interest rates five times since November and more reductions are expected in coming months, but many economists believe real rates are still too high, discouraging new investment. Economists at ANZ said further policy easing is needed soon to head off the risk of a vicious cycle of slower growth and deflation. They expect the central bank to cut banks’ reserve requirements by another 50 basis points by year-end. AGENCIES

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