China’s inflation plunged to a more than five-year low of 0.8 percent last month, official data showed yesterday, fueling fears that the world’s second-largest economy is on the brink of a deflationary spiral.
The rise in the consumer price index (CPI) was sharply down from the 1.5 percent recorded in December last year, and was the weakest since 0.6 percent recorded in November 2009, according to China’s National Bureau of Statistics.
It was also short of the median forecast of 1 percent in a survey of analysts by Bloomberg News and came despite a surprise interest rate cut in November last year.
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Analysts warned of deflation in China, a key driver of global expansion, and urged Beijing to take more measures to boost the economy.
“The weak inflation profile suggests that the deflation has become a real risk for China, thus paving way for further monetary policy easing,” ANZ economists Liu Ligang (劉利剛) and Zhou Hao (周浩) said in a research note.
Liu Dongliang (劉棟樑), a senior analyst with China Merchants Bank in Shanghai, said that consumption might have started to be affected by China’s growth slowdown, as services and consumer goods prices slumped last month.
“We should get vigilant about this sign and pay high attention to changes in the job market,” he said in a research note.
“Consumption played a key role in stabilizing economic growth last year. If consumption cools down while investment struggles to rebound, the economy will face even more trouble,” he said.
China’s economy grew 7.4 percent last year, its weakest for almost a quarter of a century, and slower than the 7.7 percent in 2013.
CPI was 2 percent last year, down from 2.6 percent in 2013 and well below the government’s target of about 3.5 percent.
The People’s Bank of China yesterday injected 80 billion yuan (US$12.8 billion) into the market through reverse repurchase agreements, known as repos, Xinhua news agency reported.
The term describes a process by which central banks purchase securities from lenders with an agreement to resell them at future dates.
It is the bank’s sixth such operation this year. The move follows an across-the-board cut last week in the percentage of funds banks must hold in reserve, the first in nearly three years, which was aimed at boosting growth.
The bank’s rate cut in November last year was the first in more than two years. Analysts had expected further monetary easing as the economy shows more signs of distress.
The statistics bureau said in a separate statement that the producer price index (PPI) — a measure of costs for goods at the factory gate and a leading indicator of the trend for CPI — declined for the 35th straight month last month.
The 4.3 percent year-on-year PPI fall was the biggest since October 2009. The last time the PPI rose was three years ago.
The nation’s economy has shown further signs of weakening momentum this year.
The Purchasing Managers’ Index (PMI), which tracks activity in factories and workshops in the country and is a closely watched indicator of the health of the manufacturing powerhouse, came in at 49.8 last month, bureau data showed earlier this month.
A figure above 50 signals expansion, while anything below indicates contraction. Last month’s reading marked the first contraction in more than two years.
The drop in consumer inflation was driven by tumbling international crude prices and warmer temperatures than average, causing vegetable, fruit and fish prices to fall, senior bureau analyst Yu Qiumei (余秋梅) said in a statement.
However, some economists downplayed the concerns, saying that CPI was distorted by a strong comparison base last year due to the variability of the Lunar New Year, which sees consumers rush to buy goods before the holiday.
Lunar New Year’s day falls on Thursday next week, but was on Jan. 31 last year.
“We do not think this should spark concerns over impending deflation, as it is likely to be the low point for inflation this year,” Julian Evans-Pritchard, an analyst with research firm Capital Economics, said in a report.
“The base effect in food prices will reverse this month, causing inflation to bounce back,” he said, adding CPI was expected to rise 1.7 percent this month.
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