De­fla­tion ‘may force cen­tral bank’s hand’

CPI PPI

China Daily (Canada) - - BUSINESS - By CHEN JIA chen­jia1@chi­nadaily.com.cn

Fur­ther eas­ing in con­sumer in­fla­tion and ac­cel­er­at­ing in­dus­trial de­fla­tion in Novem­ber re­flect stag­na­tion in the world’s sec­ond-largest econ­omy, and that may push the cen­tral bank to cut banks’ re­quired re­serve ra­tios as a means of eas­ing liq­uid­ity and sta­bi­liz­ing growth, mar­ket ob­servers said on Wed­nes­day.

They said that China’s top lead­ers may dis­cuss a re­duc­tion in the 2015 Con­sumer Price In­dex tar­get to 3 per­cent, from 3.5 per­cent this year, dur­ing the Cen­tral Eco­nomic Work Con­fer­ence in Beijing. A state­ment will be is­sued when the meet­ing ends on Thurs­day.

The com­ments fol­lowed a re­port by the Na­tional Bureau of Statis­tics, which said that the CPI edged down to 1.4 per­cent year-onyear in Novem­ber from 1.6 per­cent in Oc­to­ber, the low­est level since De­cem­ber 2009.

Warm weather and ad­e­quate sup­plies pushed food prices down 0.4 per­cent month-on-month.

The cost of items in the CPI bas­ket other than food slid 0.1 per­cent from Oc­to­ber, the first drop in three months, as global oil prices weak­ened.

“Con­sumer prices may re­main low, and the full-year CPI is ex­pected to be 2 per­cent, much lower than the 3.5 per­cent tar­get,” said Lian Ping, chief economist at Bank of Com­mu­ni­ca­tions Co Ltd.

“The CPI may con­tinue to ease next year.”

The NBS also said that the Pro­ducer Price In­dex sank 2.7 per­cent year-on-year in Novem­ber, the largest de­cline since July 2013. The in­dex has been neg­a­tive for 33 con­sec­u­tive months — the long­est pe­riod of de­fla­tion in 30 years.

The weak PPI means Chi­nese en­ter­prises are strug­gling amid the eco­nomic slow­down. Their prof­its will drop fur­ther as their debts surge,”

Deep­en­ing in­dus­trial de­fla­tion is dif­fi­cult to curb in the short term, ex­perts said, be­cause the prices of raw ma­te­ri­als, in­clud­ing oil and nat­u­ral gas, may re­main soft around the world.

Liu Ligang, chief economist in China at Aus­tralia and New Zealand Bank­ing Group Ltd, said that the cen­tral bank is likely to cut re­quired re­serve ra­tios by year-end to cur­tail de­fla­tion risks.

“The weak PPI means Chi­nese en­ter­prises are strug­gling amid the eco­nomic slow­down. Their prof­its will drop fur­ther as their debts surge,” said Liu.

The Peo­ple’s Bank of China, the cen­tral bank, cut the bench­mark in­ter­est rates in Novem­ber. But the cuts were asym­met­ric, and de­posit in­ter­est rates and in­ter­bank mar­ket rates re­main high.

“That means the ef­fect of the rate cuts is weak, and the cen­tral bank must cut the re­serve ra­tio more than once to en­sure that the mon­e­tary pol­icy is ef­fec­tive,” Liu said.

He fore­cast three RRR cuts of 50 ba­sis points each in 2015.

Strong head­winds from the prop­erty mar­ket cor­rec­tion, over­ca­pac­ity in up­stream in­dus­tries and high lo­cal gov­ern­ment debt are the main causes of the slow­down.

“In­creas­ing de­fla­tion­ary pres­sure in China will push up real in­ter­est rates and com­pel more rate cuts,” said Wang Tao, chief economist in China at UBS AG.

“We ex­pect at least two more cuts in bench­mark lend­ing rates to­tal­ing 50 ba­sis points by end-2015, and we see the cen­tral bank con­tin­u­ing to pro­vide suf­fi­cient liq­uid­ity to keep the money mar­ket rates low.

“Rate cuts are key in driv­ing down debt ser­vice bur­dens, im­prov­ing cor­po­rate cash flow and re­duc­ing fi­nan­cial risk by slow­ing the pace of non­per­form­ing loan for­ma­tion. We do not see th­ese mea­sures as hav­ing a sig­nif­i­cant stim­u­la­tive im­pact on credit and GDP growth,” she said.

LIU LIGANG CHIEF ECONOMIST IN CHINA AT AUS­TRALIA AND NEW ZEALAND BANK­ING GROUP LTD

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