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 Liu Li-Gang, chief economist of Greater China, ANZ 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. Analysts called on Beijing to release more loanable funds for commercial banks through cutting the reserve requirement ratio (RRR) – the share of deposits they are required to park at the central bank as reserve. Falling prices are the “most prominent problem” and the primary reason behind the central bank’s rate move, PBOC Deputy Governor Hu Xiaolian said last month. On November 21, the central bank cut the one-year benchmark lending rate by 40 basis points and the benchmark deposit rate by 25 basis points, and raised the float ceiling for deposit rates. However, almost every commercial bank chose to make full use of the higher ceiling of deposit rates in a bid to win clients amid severe competition, making it hard for lending costs to be effectively trimmed. The return offered by wealth management products have remained “sticky” at around 5 per cent after the rate cut, Liu noted. “Actual costs of funds facing Chinese enterprises are unlikely to drop as both deposit rate and market interest rate have risen rather than declined.” “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,” Liu said. He expects at least three 50 basis-point RRR cuts next year, assuming the government’s ongoing Central Economic Work Conference, which began Tuesday, would set a M2 growth target at around 12-13 per cent for 2015. Apart from the need to normalise RRR, Peng Xingyun, a senior researcher at the Chinese Academy of Social Sciences, said, “the odds are also quite big for us to see more interest rate cuts in the future, although the earliest possible time might be in the first quarter”. He told the South China Morning Post that falling oil prices could have positive impact in general on the Chinese economy, a large net importer of crude, by reducing the purchasing costs for companies and improving their profitability.