Deflationary pressure stemming from China's industrial sector is spilling over into the rest of the economy, squeezing corporate profits and raising the cost of debt. Producer price deflation is near the extremes seen in 2009 and while consumer price inflation popped higher in February, it averaged just 1.1 per cent year on year in the first two months of the year, down from 1.5 per cent in December. Beijing has sought to combat this pressure by easing monetary policy in several steps in recent months. But what the People's Bank of China gives with one hand, it takes away with the other. "Reluctance to allow the yuan to succumb to market pressure via the sale of foreign-currency reserves [leaves] base-money growth at its lowest since the global financial crisis," points out BNP Paribas economist Mole Hau. The policy clash is clear and risks raising debt servicing costs further not just in China, but around the region.