Cooling factory-gate inflation in China bares waning demand

BEIJING — China’s factorygate inflation cooled for a third straight month in September amid ebbing domestic demand, pointing to more pressure on the world’s second biggest economy as it remains locked in an intensifying trade war with the United States.

Consumer inflation, on the other hand, picked up slightly in September from the previous month, led mainly by higher food prices, official data showed on Tuesday.

Overall, pricing pressures were contained, giving authorities the flexibility to ease monetary policy to shore up slowing growth.

Over the weekend, central bank governor Yi Gang said he sees plenty of room for adjustment in interest rates and banks’ reserve requirement ratio due to significant downside risks from the Sino-US trade row.

Indeed, economic activity has been slackening in the past few months, prompting the People’s Bank of China (PBoC) to announce another cut to banks’ reserve requirement ratio (RRR) just over a week ago — the fourth reduction this year. For this year, Mr. Yi said that CPI will likely come in about two percent and expects PPI between 3-4%.

The producer price index (PPI), a gauge of industrial profitability, rose 3.6% in September from a year earlier, compared with a 4.1% increase in August, according to data released by the National Bureau of Statistics (NBS) on Tuesday.

On a monthly basis, the PPI picked up to 0.6% from 0.4% in August.

Julian Evans-Pritchard, senior China economist at Capital Economics, noted that the small monthly rise in producer inflation mainly reflected an ‘unsustainable” increase in global oil price. “The bigger picture is that broader factory-gate price pressures still appear to be cooling alongside weaker economic activity,” he said in a client note following the data release.

Analysts polled by Reuters had expected September producer inflation would cool to 3.5% as both external and domestic demand weakened.

Price inflation in non-metallic mineral resources, metal smelting, chemicals and coal mining all slowed in September from previous month, while extraction in oil and natural gas extended its gains.

Raw materials prices rose 7.3% in September from a year earlier, down from a 7.8% hike in August, according to the statistics bureau.

Profit growth at China’s industrial firms slowed to a five-month low in August, fanning concerns about faltering domestic demand.

The trade row with Washington appears to be already impacting industries. Growth in China’s factory sector in September stalled after 15 months of expansion, with export orders falling the most in more than two years, a private business survey showed. An official survey also confirmed a further manufacturing weakening.

The consumer price index (CPI) rose 2.5% from a year earlier, in line with expectations of 2.5% and accelerating from August’s 2.3% gain.

It remained comfortably below China’s inflation goal of three percent for 2018, same as last year.

The food price index increased 3.6% in September, up sharply from the 1.7% annual gain in September, due to extreme weather conditions such as seasonal typhoons, heavy rains and hailstorms, according to the NBS.

Despite the pickup in the headline number, the core consumer price index, which strips out volatile food and energy prices, rose 1.7% year-on-year, cooling from 2.0%’s gain in August.

Gains in non-food prices also slowed to 2.2% from August’s 2.5%.

If China goes ahead with a 15% tariff on $60 billion US goods, it could lead to a one-time impact of a 0.2-0.3% age point gain on China’s consumer inflation, according to estimates from Morgan Stanley. —