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China wholesale inflation slumps; flags deflation risk
By Langi Chiang and Simon Rabinovitch
December 10, 2008

BEIJING, Dec 10 (Reuters) - China's wholesale price inflation collapsed in November, undershooting expectations by a wide margin and raising the risk that the once-sizzling economy could find itself mired in deflation before long.

Producer price inflation fell to 2.0 percent in the year to November, well down from October's reading of 6.6 percent, the National Bureau of Statistics said on Wednesday.

Economists polled by Reuters had expected a rate of 4.4 percent [ID:nPEK354943]. The lowest forecast from the 26 institutions polled was for PPI of 3.3 percent.

Consumer inflation figures for November, due on Thursday, are likely to underscore the dramatic erosion of price pressures as energy and commodity costs slide and domestic demand weakens in tandem with the global economic downturn.

Isaac Meng, an economist with BNP Paribas in Beijing, said the drop in factory-gate inflation, which peaked at 10.1 percent in August, was hardly surprising given the drop in raw material costs but that it was no less alarming.

"The situation is quite severe. We are slipping into a deflationary recession risk pretty fast," he said.

The remarkable slackening of inflation, which Beijing declared the top economic problem at the start of the year, has given policy makers a wide berth to cut interest rates and use fiscal spending to revive the economy.

But with China already having slashed rates and announced a 4 trillion yuan ($580 billion) stimulus package, concern is turning to whether these measures may prove too little, too late.

"Although various nations have rolled out stimulus policies, I think it is still too early for them to produce desirable effects," Zhang Yongjun, senior economist at the State Information Centre in Beijing, said.

"It is quite likely for inflation to drop into negative territory at the beginning of next year," he said.


China's stock market dropped after the wholesale inflation shock but later rebounded, and the Shanghai Composite Index <.SSEC> ended the day up 2.0 percent. Trade was heavy, with investors buoyed by hopes for fresh economic stimulus measures.

There could be a silver lining in the PPI drop if consumer inflation falls more slowly than producer inflation, as the market expects, noted Kevin Lai, economist at the Daiwa Institute of Research in Hong Kong.

"The sharper fall in PPI relative to CPI means a big relief for enterprises, as margin compression is fading rapidly," he said. "This improvement will help offset the pain from a sharper slowdown in external demand."

China's leaders are meeting this week to map out economic policy for next year, with the government struggling to shore up growth and jobs.

The "central economic work conference" will meet in a closed session to discuss ways to keep annual growth at 8 percent or higher, a pledge that it has made repeatedly in recent years but looks to be on shaky ground in 2009.

China's annual GDP growth slowed to 9.0 percent in the third quarter from 10.1 percent in the second, and some forecasters see growth falling to a dangerously low 7.0 percent next year.

For a graphic of the PPI, please click on: (Additional reporting by Zhou Xin and Eadie Chen; Editing by Ken Wills)

Original Text