China's low inflation sparks fear of deflation

Updated: 2014-05-12 16:35

By Zheng Yangpeng (China Daily USA)

  Print Mail Large Medium  Small 分享按钮 0

China's consumer inflation fell to an 18-month low in April and factory-gate prices declined further, underlining sluggish domestic demand and raising concerns about deflation.

The consumer price index rose 1.8 percent in April from a year earlier, the National Bureau of Statistics said on Friday. The government's inflation ceiling is 3.5 percent for the year and economists expected price rises of 2 percent. Annual inflation was 2.4 percent in March.

Inflation is too low for an economy that expanded at an annual rate of 7 to 8 percent, and continuously low CPI starts ringing alarms of deflation, Chen Hufei, an economist with Bank of Communications Co Ltd, said.

China's economy grew 7.4 percent year-on-year in the first quarter. It was the slowest growth rate in six quarters. Economic data in April were watched globally to see if the world's second-largest economy is losing momentum or if there are signs of a rebound.

The government stressed observers should not read too much into April's inflation figure, which was attributed to a sharp drop in the cost of pork and vegetables.

Vegetable prices declined an annual 7.9 percent last month and pork 7.2 percent. The NBS said that dragged the total CPI down 0.51 percentage point. In March, vegetable costs surged 12.9 percent, while pork prices fell 6.7 percent.

April's inflation may set a tone for 2014.

China's low inflation sparks fear of deflation

"As food prices remain subdued in the coming months and money supply growth slows, we cannot see any factor that would pull inflation higher in the coming months," Chen said. "That means price gains will continue to be moderate."

Analysts said the persistent decline in China's producer price index, a main gauge of factory-gate prices, is more worrying.

China's PPI fell 2 percent in April from a year earlier, compared with a 2.3 percent decrease in March, according to NBS data. It's the 26th consecutive monthly decline for the indicator.

Of the 30 industrial sectors surveyed by the NBS, 16 recorded a decline in the factory price, led by the coal, non-ferrous metal and ferrous metal industries. Falling commodity prices and severe overcapacity in industries including steel and cement are the main reason behind the persistent decline, analysts said.

Manufacturing in April also concerned analysts. The HSBC/Markit manufacturing Purchasing Managers Index for last month edged up 0.1 percentage point from March to 48.1. It was the fourth month that the reading contracted, indicated by a result below 50.

Many economists have called for stronger measures to support the economy if the government's full-year goal of "about 7.5 percent" growth is to be realized. April's inflation data may give the People's Bank of China, the cental bank, room to relax monetary policy, they said.

"We believe it is time for the PBOC to contemplate easing monetary policy further," Liu Ligang, chief Greater China economist at Australia & New Zealand Banking Group Ltd, said in a note.

The risk of deflation has risen, and cutting banks' reserve-requirement ratio can help "meaningfully lower the lending rates facing Chinese enterprises", Liu said.

The PBOC may cut the reserve requirement ratio for banks by half a percentage point in both the second and third quarters and the government could roll out more loosening measures, Nomura Holdings Inc said.

zhengyangpeng@chinadaily.com.cn

(China Daily USA 05/12/2014 page14)

8.03K