China March inflation stays at 1.4%, keeping pressure on profit margins

SHANGHAI (Reuters) - China's consumer inflation stayed flat at 1.4 per cent in March, while producer prices fell slightly less than projected, official data showed on Friday, keeping pressure on profit margins at Chinese companies as Beijing struggles to stimulate growth.

Analysts polled by Reuters had predicted the March consumer price index (CPI) would come in at 1.3 per cent, compared with 1.4 per cent posted the prior month.

The producer price index (PPI) declined 4.6 per cent, the National Bureau of Statistics (NBS) said on Friday, extending a long-running factory deflation cycle that began in March 2012 to three years.

The poll had expected producer prices to fall 4.8 per cent from a year earlier, identical to the prior month.

The data follows a surprise recovery in manufacturing activity for March, with the official Purchasing Managers' Index (PMI), released by the NBS on April 1, edged up to 50.1, in expansionary territory, from February's 49.9.

Economists and policymakers have been worried that the risk of deflation is rising for the world's second-largest economy, as the drag from a property market downturn and widespread factory overcapacity is compounded by an uncertain global outlook and soft commodity prices.

Analysts cite serious economic headwinds, including weak demand and falling oil prices which have offset rising utilities and public services prices.

"China policymakers have eased monetary settings and housing restrictions in the past few months, though more will need to be done to lift the domestic economy," wrote Matthew Circosta at Moody's Analytics. "Slowing inflation adds upward pressure on real interest rates, which handicaps consumption and investment. We look for another 25-basis point cut in the deposit and lending rates by midyear, while reserve ratios may also be lowered," he said.

The People's Bank of China (PBOC) has made multiple cuts to guidance lending rates, and one cut to reserve requirement ratios at banks. It has also launched a long-awaited deposit insurance programme in April, but economists said those moves have had little impact on real borrowing costs.

The central bank has guided benchmark short-term money rates down sharply in recent weeks, and the interest rate yield curve has risen and steepened slightly as short term rates have fallen while longer term expectations have risen.

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