China’s Slowing Factory Prices Add to Deflation, Profit Concerns

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China’s factory inflation decelerated for a seventh month, adding to concerns about the return of deflation and the impact that will have on already weak corporate profits.

The producer price index rose 0.1 percent in January from a year earlier, the seventh straight month it has slowed, according to the National Bureau of Statistics. Economists expect it to rise 0.9 percent in 2019, well below the 3.5 percent increase last year.

Industrial profits started falling late last year and the continued slide in factory prices will exacerbate that, increasing pressure on companies which are already struggling due to the slowing economy. Factory disinflation will also likely have a downward impact on export prices, pushing them down prices around the world.

“Today’s figure bodes ill for profitability upstream,” said Raymond Yeung at Australia & New Zealand Banking Group Ltd. in Hong Kong, noting that prices for production materials actually declined 0.1 percent. “Falling factory prices will drag on industrial profits of the respective industries.”

China’s Slowing Factory Prices Add to Deflation, Profit Concerns

Consumer price inflation also slowed, rising 1.7 percent from a year earlier. With a continued slowdown in industrial output and consumption, a further deceleration in China’s economy will hurt demand for imported goods.

What Our Economists Say...

“Disinflation -- which could turn into deflation -- in producer prices, if it persisted, would have implications for monetary easing,” according to David Qu and Chang Shu at Bloomberg Economics. “The squeeze on enterprises’ profitability from persistent declines in the PPI could depress private-sector investment and economic activities -- hardly conducive for stabilization and a self-sustainable recovery.”
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Separately, credit data released Friday showed new loans riding a seasonal surge to hit a record of 3.23 trillion yuan ($476 billion). While the data may relieve some concerns over a deceleration in the world’s second-largest economy, distortions caused by the Lunar New Year holiday timing make it tough to use those figures for a definitive read on the health of the broader economy.

The nation’s economy could slow for another three to four quarters, Larry Hu, head of China economics at Macquarie Securities Ltd. wrote in a recent note, adding that “2019 could see the return of PPI deflation and negative earnings growth.”

China’s Slowing Factory Prices Add to Deflation, Profit Concerns

"Today’s figure bodes ill to the outlook of China’s manufacturing. Given a low inflationary environment, the PBOC will likely keep interest rates low," said ANZ’s Yeung. "As the deflation risk heightens, there is actually pressure for the policymaker to consider interest rate cut."

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