The easing of China’s inflation to a five-year low may increase worries that falling prices could push up real corporate funding costs after the central bank’s interest rate cut failed to effectively address the problem.
Pains brought by high financing costs have continued to plague companies on the mainland, despite the first interest rate cut in two years by the People’s Bank of China last month seeking to ease the cost burden, which ANZ Bank estimated to have remained at around 10 per cent.
The consumer price index rose 1.4 per cent year on year in November, the slowest gain since 2009, from 1.6 per cent the previous month. The official target is to contain inflation at no more than 3.5 per cent for this year.
Slumping global oil and other commodities prices have deepened China’s deflationary pressures, although they have also helped cut raw material costs for companies stumbling amid the economic downturn.
The producer price index dropped 2.7 per cent in November from a year earlier, widening from a 2.2 per cent fall in the previous month. The gauge of factory-gate price has stayed in the negative territory since March 2012, with excessive property supply and manufacturing overcapacity curbing industrial demand.
As the PBOC has exhausted its newly invented and ineffective policy tools, we believe the next move will have to be a RRR cut in order to regain policy effectiveness and credibility
The benign consumer and producer price data for November may prompt the government to roll out fresh policy steps to fend off the nascent risk of deflation.