Industrial deflation deepens in September

PPI declines for longest stretch since Asia financial crisis in 1990s

Wholesale prices fell in September for a record-tying streak while consumer inflation eased to a nearly five-year low, adding to signs of tepid demand in China.

The Producer Price Index dropped 1.8 percent year-on-year, the National Bureau of Statistics said on Wednesday.

It is the 31 consecutive month for the index to decline, matching a streak from 1997 to 1999, when a financial crisis roiled Asia. Economists noted that the drop in the PPI was even larger than in the previous two months.

The month-on-month contraction for the PPI in September was 0.4 percent, indicating that the cooling of demand in the industrial sector accelerated.

"Deflation in the industrial sector has persisted for quite a long time, which has been chiefly attributed to continued weak demand. This is quite negative for the overall economy," said Zhou Jingtong, a senior analyst with Bank of China Ltd's International Finance Institute.

Falling prices for crude oil and steel weighed on the PPI, the NBS said, as did the declining prices of other commodities.

Weakening demand is not only curbing companies' pricing power and crimping profit margins; it is also putting increasing strains on their ability to repay debt.

Zhou said it is unlikely that the PPI will rise for any of the year's remaining months.

The Consumer Price Index rose 1.6 percent year-on-year, below estimates for a 1.7 percent gain, after a 2 percent annual rise in August. The annual gain was the smallest since January 2010.

But in contrast to their concerns over the PPI contraction, economists were less worried about the trend in the CPI.

So far, consumer inflation remains well below the government's target of about 3.5 percent this year. That has renewed debate over whether monetary policy should be further eased to spur growth.

"Easing gains in non-food prices and the worsening PPI provide more evidence of a weakening economy, which means the problems of weak domestic demand and overcapacity are more severe than expected," said Li Huiyong, an economist at Shenyin &Wanguo Securities Co Ltd in Shanghai.

"We expect policymakers will take more measures to stabilize the economy. The possibility of an interest rate cut will increase in the coming months."

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