China producer prices slump as Li warns of challenges

Prices for China's factory-produced goods have fallen as growth has slowed and overseas demand slackened. - AFP/File

Beijing (AFP) - China's factory gate prices fell at their fastest rate in six years in August, the government said Thursday, as Premier Li Keqiang warned that transforming the world's second-largest economy will be a "painful and treacherous" process.

But Li expressed confidence the country will hit its expansion target of around seven percent, as Beijing looks to soothe fears about a growth slowdown that have rocked global financial markets in recent weeks.

Moderate inflation can be a boon to consumption as it pushes buyers to act before prices go up, while falling prices encourage shoppers to delay purchases and companies to put off investment, both of which can hurt economic expansion.

But prices for China's factory-produced goods have fallen as growth has slowed and overseas demand slackened, while the key property market has also weakened, hitting demand for construction materials.

Plants -- many of them state-owned -- are also loath to drastically cut employees, leading to continued production even when demand is weak.

China's producer price index (PPI) declined 5.9 percent in August, the National Bureau of Statistics (NBS) said.

The result was the worst since a 7.0 percent fall in September 2009 and marked the 42nd consecutive monthly drop.

Growth in China's gross domestic product (GDP) hit a 24-year low last year, expanding 7.3 percent amid a steady slowdown from years of double-digit expansion. It has slowed further this year, increasing 7.0 percent in each of the first two quarters.

"We are quite concerned by deepening PPI deflation," Nomura economists said in a research note.

"Month-on-month deflation has worsened in the third quarter, which is consistent with weaker growth momentum. This is also why the government will use its fiscal stimulus to bolster the economy, primarily by boosting infrastructure investment."

PPI is a leading indicator for consumer inflation, which rose to 2.0 percent in August, the NBS said, its highest in 12 months.

China is looking to move its economy from the investment- and export-led model of the past to one driven by consumer demand, and Premier Li told a World Economic Forum meeting in the northeastern city of Dalian that it "is going to be a painful and treacherous process".

But he insisted China did not threaten the world economy, and was itself buffeted by global trends.

"China is not a source of risk for the world economy but a source of strength for global growth," Li said, stressing that it accounted for about 30 percent of world economic expansion in the first half of this year.

"China is an economy that is closely integrated with the international market," he said.

"Given the weak growth of the global economy, China cannot stay unaffected and the deep-seated problems that have built up over the years are also being exposed."

- No 'hard landing' -

China's Communist rulers are estimated to have spent more than $200 billion trying to prop up prices on the country's stock exchanges as the benchmark Shanghai Composite Index has plunged around 40 percent since mid-June.

But Li said that policymakers would not be moved by short-term movements in the economy, while standing ready to take action as necessary.

"If there are signs the economy is sliding out of the proper range we have adequate capability to deal with the situation," he said. "The Chinese economy will not head for a hard landing."

China's finance ministry on Tuesday said it will adopt "stronger" fiscal policies to support the economy, with accelerating major construction projects one of its priorities.

"We have the capability to achieve all the major targets of economic development for this year," Li said.

The consumer price index (CPI) rise was higher than July's 1.6 percent and the strongest since last August, driven by rising pork costs.

The growth slowdown and declines in commodity prices have helped keep China's consumer inflation in check, with some economists even voicing concerns about possible deflation.

CPI touched 0.8 percent in January -- its lowest in more than five years -- but the measure has now risen for three straight months.

"Looking ahead, we expect both measures of inflation to rebound over the coming quarters," Julian Evans-Pritchard, China economist at Capital Economics, said in a note, referring to CPI and PPI.

He added that steep falls in pig numbers will keep food prices high, while the decline in global commodity prices late last year mean both inflation measures should strengthen soon on weaker bases for comparison, "which ought to help assuage any lingering concerns over deflation".