China's factory prices post steepest fall in 3 years

A customer (L) shops for vegetables at a market in Beijing on October 15, 2019. (AFP photo)

China's factory gate prices declined at the fastest pace in more than three years in September, reinforcing the case for Beijing to unveil further stimulus as manufacturing cools on weak demand and US trade pressures.

September's producer price index (PPI), considered a key barometer for corporate profitability, dropped 1.2% year-on-year, National Bureau of Statistics (NBS) data showed on Tuesday. It marked the steepest factory price decline since July 2016 but matched forecasts in a Reuters survey of analysts.

The grim outlook is unlikely to change even as tensions in the year-long trade war between Beijing and Washington have eased somewhat. U.S. President Donald Trump said on Friday the two sides had reached agreement on the first phase of a deal and suspended a tariff hike, but officials said much work still needed to be done.

Some analysts expect China's overall GDP growth rate to slip below the government's 6.0%-6.5% target range this year.

Trade data released on Monday showed contractions in both exports and imports as US tariffs implemented on Sept. 1 came into effect, underscoring the continued impact of the bilateral dispute.

China has taken a cautious approach in dealing with the slowing economy. Stimulus to date has largely avoided dramatic increases in government spending and the central bank has also mainly used the reserve requirement ratio for banks instead of sweeping interest rate cuts.

Chinese central bank governor Yi Gang said late in September there was no urgent need to implement large interest rate cuts following Beijing's reiteration that it would not use "flood-like" stimulus measures.

Analysts say they expect greater stimulus measures at the end of the month, however, when China's Politburo, the top decision making political body, is expected to meet.

"Since there is very limited policy autonomy at ministries, local governments, and SOEs (state-owned enterprises), the policy decision pass-through has to come from the above," said analysts last week in a note from Bank of America Merrill Lynch.

The People's Bank of China cut a reserve ratio for banks in September, freeing up $126 bln for loans.

Pork prices continue to soar

Data released by NBS Tuesday also showed China's consumer price index (CPI) rose 3% from a year earlier, higher than 2.9% tipped by analysts and marking the fastest increase since October 2013, when it rose 3.2%.

While September's CPI still remained within China's official target of around 3%, and core CPI has remained relatively stable, growing 1.5%, consumer inflation, in particular food prices, continued to surge.

Food prices have soared, driven mainly by rising pork prices as African swine fever diminishes hog supplies. Pork prices jumped in September, with a year-on-year growth of 69.3%, compared to 46.7% in August.

The food price index in September rose 11.2% from a year earlier, compared with 10% in the previous month.

China has been battling a devastating case of African swine fever and has implemented a series of policies to try to replenish its herds, including flying in 900 breeding pigs from Denmark. 

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