By Nipa Piboontanasawat and Li Yanping
Dec. 10 (Bloomberg) -- China’s producer-price inflation slowed to half the pace estimated by economists as commodity and energy costs fell, raising the possibility that the country will slide into deflation as demand wanes at home and abroad.
Prices at the factory gate rose 2 percent in November from a year earlier, the statistics bureau said today, after gaining 6.6 percent in October. That was the slowest pace in two years and less than the 4.5 percent median estimate of 15 economists surveyed by Bloomberg News.
Cooling inflation gave the central bank room to slash interest rates by the most in 11 years last month to counter a deepening slowdown in the world’s fourth-biggest economy. A global recession is cutting demand for exports just as falling property prices and sales slow construction and consumption.
“China may face deflation next year, which could be problematic, and the government is trying to avoid it,” said Isaac Meng, senior economist at BNP Paribas SA in Beijing. “Inflation is no longer an issue for policy makers; the global recession and a slump in the property market have dragged down demand and prices for industrial goods.”
Foreign direct investment in China fell 36.5 percent in November from a year earlier, the commerce ministry said today, as economic growth cooled and gains by the yuan stalled against the dollar. Investment was $5.3 billion, the least in 14 months.
Yunnan Tin
The CSI 300 Index of stocks climbed 0.5 percent as of 1:38 p.m. in Shanghai on speculation that interest rates will be cut further to boost growth. The yuan rose to 6.8632 against the dollar from 6.8651 before the producer-price announcement.
China’s Yunnan Tin Co., the world’s biggest producer of the metal, said yesterday that it had suspended output at its smelter for at least a month because of falling prices.
“In 2009, there is a possibility that China’s producer- price inflation could temporarily dip into negative territory, given the sharp fall in commodity prices,” said Jing Ulrich, chairwoman of China equities at JPMorgan Chase & Co. “However, a potential increase in electricity tariffs in the New Year would keep price inflation for producers at a higher level than for consumers.”
The central bank last month reduced borrowing costs for a fourth time since mid-September, leaving the key one-year lending rate at 5.58 percent and the deposit rate at 2.52 percent.
“There is still a lot of room for the central bank to cut interest rates, ” said Meng, of BNP Paribas.
Gasoline, Diesel
Crude oil has plunged about 70 percent in the second half of this year and copper has fallen about 64 percent. The Reuters/Jefferies CRB Index of 19 raw materials has declined about 53 percent.
China will cut gasoline and diesel prices next month, the official Xinhua News Agency reported yesterday, citing a government planner. The nation is accelerating changes to its oil pricing system to reflect cheaper costs and stimulate growth.
China’s economy expanded 9 percent in the third quarter from a year earlier, the slowest pace since 2003. Next year’s expansion may be as little as 5.5 percent, the least since 1990, according to CLSA Asia-Pacific Markets.
House prices in 70 major cities fell 0.5 percent in November from the previous month, the government said yesterday. Prices have declined for four straight months.
Economic Reversal
“In less than six months, the inflation problem and ongoing over-heating of the Chinese economy has turned to a strong probability of a deflation problem,” Stephen Koukoulas, the London-based head of global foreign exchange and fixed- income strategy at TD Securities, said last month.
Producer-price inflation is down from 10.1 percent in August, which was the fastest pace since at least 1996.
Consumer-price inflation has fallen from a 12-year high of 8.7 percent in February. Last month, the rate was 3.3 percent, the lowest in 19 months, according to the median estimate of 18 economists surveyed by Bloomberg News. The number will be released tomorrow.
Besides cutting borrowing costs, the central bank has lowered the proportion of deposits that lenders must set aside as reserves, scrapped temporary loan controls and sold fewer bills, boosting liquidity to encourage lending and investment.
The government last month announced a plan to spend 4 trillion yuan ($586 billion) through 2010 to boost domestic demand by building houses and infrastructure and cutting a private-investment tax.
For the first 11 months, producer prices increased 7.6 percent from a year earlier.
Purchasing prices climbed 4.7 percent in November and 11.6 percent in the first 11 months, the National Bureau of Statistics said.
To contact the reporter on this story: Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net
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