China’s Stabilizing Consumer Prices Leave More Room for Stimulus

Updated on
  • Consumer inflation at about half of government's goal for 2015
  • Factory-gate prices extended declines to a record 46 months

China’s consumer inflation remains muted at about half the government’s target for 2015, leaving policy makers more room to add to their record stimulus to help boost flagging growth.

The consumer price index rose 1.6 percent in December from a year earlier, the National Bureau of Statistics said Saturday. That rise, which matched economist forecasts, followed a gain of 1.5 percent in November. The producer price index fell 5.9 percent for the fifth straight month, extending declines to a record 46 months. Economists had projected a 5.8 percent decline.

"The CPI remains considerably below the government’s target of 3 percent for 2015 and is set to stay low heading into 2016," Tom Orlik, an economist at Bloomberg Intelligence in Beijing, wrote in a note. "That provides motive and opportunity for further easing."

Fresh signs of further economic weaknesses are an unwelcome signal for policy makers as the nation’s stock selloff and the depreciation of the yuan roil global financial markets. While the nation’s top leaders have vowed to support the real-estate market and reduce overcapacity this year, a protracted slowdown will make those tasks difficult to achieve.

Food prices helped drive the CPI gain, climbing 2.7 percent from a year earlier, while non-food prices rose 1.1 percent. Prices of consumer goods gained 1.5 percent and those for services advanced 2.1 percent, NBS said.

Manufacturing Weakness

The outlook for growth, already at the slowest pace in a quarter century, has been dimmed by falling shares and slowing exports, which declined 6.8 percent in November from a year earlier. The official purchasing managers index signaled weakness for a fifth straight month in December, keeping the manufacturing gauge near a three-year low.

China’s main stock benchmark, the Shanghai Composite Index, tumbled 10 percent in the first week of trading this year. The yuan fell to a five-year low this week.

To help lower borrowing costs, Orlik estimates the People’s Bank of China will cut interest rates twice this year for a total reduction of half a percentage point.

Other economists said after the inflation data they expect the PBOC to cut the required reserve ratio for major banks, which sets the share of deposits locked away at the central bank. Policy makers last cut the ratio in October, reducing it to 17.5 percent, while also lowering the one-year lending rate, their main policy tool, to a record 4.35 percent.

Deflation Risk

"As deflationary pressure continues to build up, further monetary policy easing is needed," Liu Ligang, head of greater China economics at Australia & New Zealand Banking Group Ltd. in Hong Kong, wrote in a note after the data.

He expects the PBOC to cut the required reserve ratio by two percentage points through 2016, starting this quarter.

"Soft domestic demand and depressed global commodity prices suggest that the risk of deflation looms large," Liu said.

The inflation readings leave "more room for PBOC to ease monetary policy," said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. While deflation is still a risk, lowering the reserve requirement will be a better option than cutting the main interest rate because that may destabilize the yuan, Shen said.

Consumer prices have posted a 1.4 percent average increase over the past 12 months. The gauge reached a 2015 peak of 2 percent in August.

"The inflation profile remains soft," said Zhou Hao, an economist at Commerzbank AG in Singapore. "Continuous PPI deflation suggests that Chinese companies will have to reduce their debt as further expansion in many industries will only lead to more loss."