2nd LD-Writethru-China Focus: China still faces deflationary pressures

Although China's consumer inflation picked up in November, flagging producer prices still put high deflationary pressure on the economy, new data showed Wednesday.

China's consumer price index (CPI), a main gauge of inflation, grew 1.5 percent year on year in November, up from a rise of 1.3 percent in October, the National Bureau of Statistics (NBS) said in a statement.

The reading was slightly higher than a 1.4-percent average increase in the first 11 months.

The NBS attributed the rise mainly to rising food prices, as vegetable prices surged 9.4 percent year on year last month, while prices for meat and poultry products rose 6.2 percent. Food prices, which account for nearly one-third of the weighting in China's CPI, rose 2.3 percent from a month earlier and contributed more than half of the headline CPI inflation.

HSBC analyst Qu Hongbin said the November inflation was slightly higher than previous market forecasts, as snow in north China pushed up transportation costs for fruit and vegetables.

Non-food inflation also edged up due to higher prices of medical care, transportation and communication products.

However, average inflation in the first 11 months was 1.4 percent, far below the 2.0 percent in the same period of 2014 and the government target of around 3 percent.

On a month-on-month basis, consumer prices stayed flat in November.

Last month, the producer price index (PPI), a measure of costs for goods at the factory gate, plunged 5.9 percent year on year last month, marking the 45th straight month of decline.

The PPI and CPI are related, as the PPI reflects prices in production, while the CPI reflects prices at the point of consumption. Price fluctuations usually first appear in the production phase before being passed on to consumers.

Producer prices continued to fall broadly, with oil-related sectors and heavy industry such as ferrous metal processing seeing the sharpest price declines, data showed.

PPI deflation has stayed at 5.9 percent for four months in a row, indicating that deflationary pressure in the economy has not relented and monetary easing policies are still necessary in the next two years, Qu said.

Falling commodity prices aside, sluggish domestic demand is the main factor weighing on PPI inflation, HSBC said in a research note.

Prolonged deflation will pose risks to the economy by eroding growth potential and might also put the economy at risk of a downward spiral, HSBC said.

Dragged down by sluggish demand, weak exports, a property downturn, China's economy expanded by 6.9 percent year on year in the third quarter of 2015, the lowest quarterly growth in six years.

To combat the economic slowdown, the central bank has cut the benchmark interest rates and the reserve requirement ratio of banks several times since the beginning of the year.

HSBC said more aggressive policy easing is still key to stabilizing growth in the coming months.

"We forecast another 100 bps (basis points) reserve ratio cut for the rest of 2015," HSBC said, adding that it expects another 50 bps policy rate cut and 400 bps reserve ratio cut as well as a bigger fiscal deficit in 2016.

A report from investment bank CICC also said that continued deflationary pressure in manufacturing prices requires further monetary easing.

"More importantly, fiscal policy will have to pull more weight towards stabilizing growth," the CICC said.

There is ample room for more measures to combat deflationary pressure, such as reserve ratio cuts, relief in tax and fees, fiscal spending, as well as a substantial increase in sovereign and policy bank bond issuance, the CICC said. Endi