China's January inflation drops to five-year low

Beijing

CHINA'S inflation dropped to a five-year low in January, official statistics showed with prices falling 0.8 per cent year-on-year, piling pressure on the central bank to further loosen monetary policy.

Analysts had expected CPI to increase one per cent monthly, according to a Bloomberg estimate.

While some of the decrease is due to seasonal factors - such as Chinese New year which distorts prices for the January-February period - and warmer-than-usual weather, analysts worry the low figure could hide deeper troubles in the Chinese economy already facing headwinds at home and overseas.

"The subdued CPI inflation print for January partly reflects a distortion from the Lunar new year which falls in February this year but was in January last year, but we believe underlying disinflationary pressures have risen, with CPI inflation easing across the board," HSBC's greater China economist, Julia Wang, said.

The annual Chinese New Year break sees millions of factories halt and workers head home. The season often distorts data as consumers buy heavily ahead of the holiday.

A closer look at the figures shows that food inflation was the driver behind Tuesday's surprise drop. Food prices rose 1.1 per cent this year against 2.9 per cent in January last year.

International prices for commodities and energy also pushed down CPI. Falling oil and energy prices in January dragged down transport cost inflation and lowered household utility bills.

While food inflation is expected to tick back up after Chinese New Year, analysts say the price decrease could signal mounting disinflationary pressures as China braces itself for its worst economic growth in decades. Falling prices will weigh on firms' profit margins and could delay purchase of goods by consumers as they wait for more price drops.

Core inflation reflecting consumer demand eased to 1.2 per cent last month from 1.3 per cent in December, the lowest since September 2010, the data showed.

China's economy grew 7.4 per cent last year hit by low commodity prices, lingering demand at home and overseas and structural rebalancing. The government is expected to lower the GDP target to 7 per cent during this year's National People's Congress due to convene next month.

"We believe underlying disinflationary pressures have risen, with CPI inflation easing across the board. This is more evident in the deepening of PPI deflation. The disinflationary pressures reflect weakening demand in the economy and worsening overcapacity in upstream industries," Nomura analysts said in a research note on Tuesday.

In January, the producer price index (PPI) fell for a 35 consecutive month to 4.3 per cent from 3.3 per cent in December, the lowest since October 2009.

This shows that for some industries, such as ferrous metal processing, output prices contracted more than input prices, reflecting strong pressures to cut capacities and little improvement in end demand.

Many companies in the steel and cement sector are struggling with inherent overcapacity and falling coal prices.

Tuesday's data comes after disappointing monthly PMI and trade figures which prompted the central bank last week to cut reserve requirement ratios for banks across the board by 50 basis points. This was the first system-wide cut since May 2012.

That comes after a surprise interest rate cut in November, the first in more than two years.

"Together with the weak trade data released over the weekend, which also point to weak domestic demand, pressures will increase for the PBoC (central bank) to ease more. We continue to expect another 25 basis points cut to the policy rate in Q1," HSBC said.