China's factory-gate inflation slows as trade war rumbles on

Workers sewing shoes at a factory in Qingdao in China's Shandong province. China's producer price index rose 0.9 per cent year on year in December, compared with a 2.7 per cent rise the previous month.
Workers sewing shoes at a factory in Qingdao in China's Shandong province. China's producer price index rose 0.9 per cent year on year in December, compared with a 2.7 per cent rise the previous month.PHOTO: AGENCE FRANCE-PRESSE

BEIJING • The cost of producing goods in China's factories slowed sharply last month, a sign that demand remains weak as the US trade war drags on, while consumer inflation also flagged, official data showed yesterday.

The producer price index (PPI) - an important barometer of the industrial sector that measures the cost of goods at the factory gate - rose 0.9 per cent year on year in December, compared with a 2.7 per cent rise the previous month.

The reading marked the lowest growth since September 2016, and fell short of forecasts in a Bloomberg News survey.

A slowdown in factory-gate inflation reflects sluggish demand, while a turn to deflation could dent corporate profits.

It "may enter negative territory very soon given the negative sequential growth it already recorded", Goldman Sachs economists forecast. "This disinflation is reflected already in the industrial profit data, which entered negative territory," they wrote in a research note.

The consumer price index (CPI) - a key measure of retail inflation - rose 1.9 per cent, compared with 2.2 per cent in November.

"Both readings fell short of market forecasts," said Nomura economist Lu Ting. "Rapidly falling inflation, especially factory-gate PPI inflation, is further evidence that China's economy is slowing at a worrying pace. Slumping PPI inflation suggests corporate earnings will almost surely continue to fall in coming months." Mr Lu said the PPI was expected to turn negative, which would put "further downward pressure on China's growth".

WORRYING SIGN

Rapidly falling inflation, especially factory-gate PPI inflation, is further evidence that China's economy is slowing at a worrying pace.

NOMURA ECONOMIST LU TING

The weak figures come as China's trade war with the United States starts to bite and economic growth slows, with data last week showing the manufacturing sector contracted in December for the first time in more than two years.

There are hopes for a breakthrough in the trade row, with a US negotiating team leaving Beijing on Wednesday after three days of talks that China said had "laid the foundation" to resolve concerns held by both sides.

REUTERS

A version of this article appeared in the print edition of The Straits Times on January 11, 2019, with the headline 'China's factory-gate inflation slows as trade war rumbles on'. Print Edition | Subscribe