China factory inflation eases

China’s factory inflation moderated as consumer price gains remained tepid, further reducing a potential source of pressure for policy makers to boost borrowing costs.

While this year’s surge in raw-materials prices will feed through to consumer products next year, headline factory price growth is seen slowing amid higher year-ago base comparisons and moderating investment demand. As top leaders step up pledges to ensure financial stability amid soaring debt, economists say moderate inflation and an outlook for tame price gains gives the authorities less cause to pursue a broad tightening of borrowing costs.

Slowing inflation helps ease concerns on tighter monetary policy,” said Tommy Xie, an economist at Oversea-Chinese Banking  in Singapore. “The CPI drop was mostly driven by the decline in food prices, while PPI fell because the base last year was too high. I expect consumer inflation to remain largely stable and fluctuate around 2 per cent in the coming year, while the growth of PPI will very likely fall below 5 per cent in December.”

“Easing of inflation is probably something policy makers are willing to see, as this suggests China isn’t under pressure to boost interest rates,” said Xia Le, chief Asia economist at Banco Bilbao Vizcaya Argentaria SA in Hong Kong. “As now stricter financial regulation dominates the market sentiment, the authorities may not hope to also increase borrowing costs with tighter monetary policies.”

“We should expect, given the impact of the base effect, that PPI will continue to fall,” said Christopher Balding, an associate professor at the HSBC School of Business at Peking University in Shenzhen.