China Factory Deflation Worsens as Pork Drives Consumer Prices

Pigs stand in a holding pen at a wholesale market in Nanning, Guangxi province, China, on Monday, Sept. 16, 2019. A protracted U.S. trade war, protests in Hong Kong, soaring food prices and the slowest economic growth in decades are among the many problems facing Chinese President Xi Jinping as he prepares to celebrate 70 years of Communist Party rule. Photographer: Qilai Shen/Bloomberg , Bloomberg

Bloomberg News, Bloomberg News

Oct 14, 2019

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(Bloomberg) -- China’s factory deflation deepened in September due to slowing economic growth and the comparison with faster rises a year ago, even as the surge in pork prices drove consumer inflation higher.

  • Factory prices fell 1.2% from a year earlier, as forecast by economists in a Bloomberg survey
  • The consumer price index rose 3% year-on-year, the fastest since 2013 and higher than 2.8% in August

Key Insights

  • Food prices rose 11.2%, with pork prices surging 69.3%, according to the National Bureau of Statistics. Consumer inflation excluding food and energy remained stable at 1.5%
  • Chinese policy makers are facing a rising divergence in inflation, with surging food prices pushing up what consumers pay, while deflation has returned to the industrial sector making debt repayment more difficult. The PBOC has increased liquidity supply to banks but has refrained from cutting benchmark interest rates so far
  • “The return to PPI deflation since July is not only acting as a drag on manufacturing investment, already under stress from U.S.-China trade tensions and supply-chain relocation, but also poses a major risk for onshore corporate debt refinancing,” Bo Zhuang, chief China economist at research firm TS Lombard, said before the data. “Sustained PPI deflation, where the monthly rate remained below -2% for more than three to six months, would be a likely catalyst for the reversion to old-style credit stimulus.”
  • “Surging pork prices as a result of the African swine fever outbreak could cause headline consumer price inflation to increase beyond the 3% official target in the coming months,” Tommy Wu, senior economist at Oxford Economics Hong Kong Ltd, wrote in a report before the data. “But we don’t think that CPI inflation will rise substantially beyond the target and create a major constraint on Chinese monetary policy.”

To contact Bloomberg News staff for this story: Yinan Zhao in Beijing at yzhao300@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James Mayger

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