Factory Deflation Looms in China, Posing Risk to Global Prices

(Bloomberg) -- China’s producer prices are set to weaken on soft demand and lower commodity costs, adding another headwind to policymakers already struggling with trade tensions and a deteriorating growth outlook.

"Upstream prices fell much more significantly, which means year-over-year producer-price inflation is likely to be lower than consumer inflation for the first time in eight quarters and may enter negative territory very soon," Song Yu, chief China economist at Beijing Gao Hua Securities Co., Goldman Sachs Group Inc.’s mainland joint-venture partner, wrote in a recent note.

Factory Deflation Looms in China, Posing Risk to Global Prices

December’s PPI index is estimated to slow to 1.6 percent, the slowest pace since 2016, according to the median forecast of economists ahead of data due Thursday. Jiang Chao from Haitong Securities Co. says the turning point could come in January as steel and coal prices drop and oil prices remain low.

Sliding factory prices will further erode industrial profits, weakening China’s highly-indebted companies’ ability to repay their loans. There’s also a clear link between China’s factory and export prices, meaning the PPI slide could act as a drag on the global price outlook too.

Factory Deflation Looms in China, Posing Risk to Global Prices

The country experienced a 4 1/2 year streak of factory deflation from 2012 to 2016, compounding its debt problems and adding to the world’s deflationary challenge. Lower factory prices increase the real interest rate for related companies.

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