Deflation fears grow in China

Producer price index sinks most in 6 years

A customer selects vegetable at a supermarket in Hangzhou, Zhejiang province yesterday. The consumer price index (CPI) rose 2% in August from a year earlier, due largely to soaring food prices, not an improvement in economic activity. (Reuters photo)

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

The producer price index (PPI) fell 5.9% in August from the same period last year, its 42nd consecutive month of decline and the biggest drop since the depths of the global financial crisis in late 2009, data showed yesterday.

The market had expected a decline of 5.5% after a drop of 5.4% in July.

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

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

The consumer price index (CPI) rose 2% from a year earlier to a one-year high, the National Bureau of Statistics said, but the gain was due largely to soaring food prices, not an improvement in economic activity.

Analysts polled by Reuters had predicted CPI would rise 1.8%, compared with 1.6% posted the prior month.

Indeed, non-food inflation remained subdued at 1.1%, 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 Kevin Lai, chief economist Asia Ex-Japan at Daiwa Capital Markets Hong Kong Limited, adding that his firm had just cut its 2016 CPI forecast to -0.5% from 0.5%.

“In addition all the capital outflows (due to the slowing economy) 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 People’s Bank of China to cut banks’ reserve requirements (RRR) by another 50 basis points by year-end.

Data earlier this week showed imports tumbled more than expected in August while exports shrank again, pointing to persistently weak demand both at home and abroad.

Other data from China this week — including industrial output and investment on Sunday — are likely to be downbeat, keeping financial markets on edge.

Fears of a China-led global slowdown have grown in recent weeks after a series of grim factory activity surveys.

The government is also still struggling to stabilise the yuan after its surprise devaluation of the currency on Aug 11 and halt a stock market rout that has seen the country’s share indexes plunge 40% since mid-June.

Analysts say weak data over the summer is putting Beijing’s official 7% growth target for this year at risk.

That level would mark China’s weakest expansion in a quarter of a century, but some economists believe current growth levels are already much weaker than official numbers suggest.

The chairman of the National Development and Reform Commission (NDRC) said on Wednesday that China’s economic fundamentals “are healthy while still facing relatively large downward pressure.”

Separately, the Finance Ministry said on Tuesday that it would strengthen fiscal policy, boost infrastructure spending and speed up reforms to support the economy.

Source:  Reuters  September 11, 2015

TOM’S COMMENTS:  If you’re global sourcing out of China, time to renegotiate pricing.  If you’re sourcing strategy is mostly China-centric, then move quickly to spread your risks to other Asian countries. 

Let Nova Advisors help you:  thomas@novaadvisors.com

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About thomasdinnocenzi

Thomas D’Innocenzi is a highly accomplished, results-focused international consultant with extensive experience in global sourcing and business development worldwide to meet evolving business needs. Tom has proven ability in implementing and managing profitable global marketing and sourcing operations. He has extensive experience in international business development to accommodate rapid growth. Skilled in building top-performing teams, bench-marking performance, and developing organizations to improve efficiency, productivity, and profitability. Experienced transition leader and change agent. Tom founded Nova Advisors with the mission of providing expert Global Business Development consulting services for companies seeking to expand their market share as an independent consultant. Tom has a network of experts and advisors throughout the Asia-Pacific region and North America. His expertise includes business development, global sourcing, manufacturing, commodities, logistics, QA/QC, FDA, regulatory compliance, sustainability, and supply chain optimization. Tom is experienced in the medical device, apparel, consumer goods and technology services verticals helping companies advance their global sourcing capabilities and develop new markets through a local and sustained approach. Located in SE Asia and the United States, Tom expands market reach to drive sales. His global sourcing strategy includes directly negotiating with commodity suppliers, supply chain networks and distributors for optimal terms based on his expertise and first-hand knowledge of the players. Contact Tom to use his consulting service to increase your global market and make global sourcing profitable for you in the Asia Pacific Region and the United States. http://www.NovaAdvisors.com thomas@NovaAdvisors.com USA Direct: +1.904.479.3600 SINGAPORE: +65.6818.6396 THAILAND: +662.207.9269
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