China January inflation quickens less than expected, showing deflationary pressure persist

Shoppers ride on a travellator at a supermarket in Beijing.
Shoppers ride on a travellator at a supermarket in Beijing.PHOTO: REUTERS

BEIJING (REUTERS) - China's consumer inflation quickened in January due to rising food prices while producer prices declined for 47th straight month, as falling commodity prices and weak demand add to deflationary pressure in the world's second-largest economy.

The consumer price index (CPI) rose 1.8 per cent in January from a year earlier, slightly less than market expectations and up from a 1.6 per cent increase in December, data from the National Bureau of Statistics (NBS) showed on Thursday (Feb 18).

The slight increase was mainly due to a 4.1 per cent seasonal rise in food prices before the Lunar New Year celebrations, and did not imply any visible improvement in economic activity and broader consumer demand, analysts said.

Non-food consumer inflation remained mild, with an annual growth rate of 1.2 per cent in January, up only marginally from December.

The producer price index (PPI) fell 5.3 per cent in January from a year earlier, slightly less than market expectations of a 5.4 per cent decline and easing from a fall of 5.9 per cent in the prior month.

"Overall, China will likely face strong deflationary pressure in the remainder of the year," economists at ANZ said in a research note.

"In addition to the risk of deflation, China also continued to face capital outflows in January, as foreign reserves declined further. Therefore, we believe that further monetary policy easing is still needed. We maintain our forecast for China to lower the RRR (banks' reserve requirement ratio) by 50 basis point in the first quarter."

Chinese producers have seen their selling prices fall for nearly four straight years, reflecting sliding commodity prices, sluggish demand at home and overseas and overcapacity in key sectors including steel and energy.

Industrial profits fell for a seventh straight month in December, and were down 2.3 per cent in 2015.

Many firms in the industrial sector also face very high refinancing costs in real terms, which have helped fuel bond defaults and an increase in bad loans.

Non-performing loans at Chinese commercial banks rose to 1.27 trillion yuan (S$273.6 billion) in 2015, or 1.67 per cent of total loans, the banking regulator said on Monday.

A Reuters analysis of 1,200 firms listed on China's stock markets showed strains on corporate China are intensifying, with many businesses finding more cash is being tied up in unsold inventory while unpaid invoices are piling up as struggling customers take longer to pay.

Beijing has vowed to tackle the overcapacity problem this year, squeezing out so-called "zombie firms" which are perennial loss makers, but its plans to cut steel capacity alone will lead to the loss of up to 400,000 jobs, the official Xinhua news agency reported last month.

Consumer prices have held up better, reflecting the relative strength of the labour market, but analysts have been watching closely to see whether weakness in the industrial sector and anaemic global trade will start to be felt more strongly in wages and income growth this year.

Complicating the central bank's efforts to ward off a deeper fall in prices are its efforts to stem capital outflows and fight speculators betting on further falls in the yuan.

The weaker yuan - down around 5 per cent against the US dollar since August 2015 - boosts the prices of imported goods in yuan terms.

But People's Bank of China officials have indicated that they are wary of further broad-based monetary easing such as interest rate cuts, which could help boost activity and prices but spur higher capital outflows and put more pressure on the yuan.

The bank has cut benchmark interest rates six times since November 2014, but has held off on further reductions in benchmark rates or bank reserve ratios since late October, preferring to rely on short-term money market injections instead.

China's economic growth cooled to 6.9 per cent in 2015, the slowest pace in a quarter of a century, weighed down by weak demand at home and abroad, industrial overcapacity, slowing investment and a struggling property market.

Economists see growth slowing further to the mid-6 per cent range this year. Some market watchers believe it may already be much weaker than official data suggests.